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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Energy and Infrastructure Unit India Country Management Unit South Asia Regional Office Document of The World Bank FOR OFFICIAL USE ONLY PROJECT APPRAISAL DOCUMENT ON A PROPOSED CREDIT IN THE AMOUNT OF SDR 26 MILLION (USS3 MILLION EQUIVALENT) AND PROPOSED LOAN IN THE AMOUNT OF US$ 1 MILLION TO THE GOVERNMENT OF INDIA FOR A RURAL ROADS PROJECT August 16,24 Report No: IN This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective July 15, 24) Currency Unit = Rupee (Rs.) Rs.l.OO = US$.22 US$l.OO = Rs lakh = 1, 1 Crore (Cr.) = 1,, FISCAL YEAR April 1 - March 31 ADB ARCS CAAA CAO CAS CBO CPAR CQ DEA DS ECOP EMP EOP ERR ESA ESMF FM FMR FMS GO1 HP HQ IBRD ICB ICR IDA IRC IT M&E MERR Asian Development Bank Audit Reports Compliance System Controller of Aid, Accounts and Audit Chief Accounts Officer Country Assistance Strategy Community Based Organization Country Procurement Assessment Review Selection Based on Consultants' Qualification Department of Economic Affairs Deputy Secretary Environmental Codes of Practice Environmental Management Plan End of Project Economic Rate of Return Environment and Social Assessment Environment and Social Management Frame work Financial Management Financial Monitoring Reports Financial Management System Government of India Himachal Pradesh Headquarters International Bank for Reconstruction and Development International Competitive Bidding Implementation Completion Report International Development Association Indian Road Congress Information Technology Monitoring & Evaluation Modified Economic Rate of Rem ABBREVIATIONS AND ACRONYMS MORTH MORD MoU MTR NBF NCB NGO NPV NRRDA OM OMMS PCI PIU PMGSY PRI PWD QBS QCBS QPR RDD REO RES RMS R&R SBD SFB SOM SRRDA up voc Ministry of Road Transport & Highways Ministry of Rural Development Memorandum of Understanding Mid-Term Review Non Bank Financed National Competitive Bidding Non Government Organization Net Present Value National Rural Road Development Agency Operational Manual On-line Monitoring & Management System Pavement Condition Index Program Implementation Unit Pradhan Mantri Gram Sadak Yojana Panchayat Raj Institution (3 tiers of local government) Public Works Department Quality based Selection Quality and Cost Based Selection Quarterly Progress Report Rural Development Departments Rural Engineering Organization of Jharkhand Rural Engineering Services of Uttar Pradesh Road Management System Resettlement & Rehabilitation Standard Bidding Document Selection under a Fixed Budget Supplemental Operations Manual State Road Rural Road Development Agency Uttar Pradesh Vehicle Operating Costs Vice President: Country Director: Sector Director: Task Team Leader: Praful C. Pate1 Michael F. Carter, Vincent Gouame Piers A. Vickers

3 INDIA Rural Roads Project CONTENTS FOR OFFICIAL USE ONLY A. B. Page STRATEGIC CONTEXT AND RATIONALE Country and sector issues Rationale for Bank involvement Higher level objectives to which the project contributes... 3 PROJECT DESCRIPTION Program objective and Phases Project development objective and key indicators Lending instrument... 4 Project components Lessons learned and reflected in the project design Alternatives considered and reasons for rejection... 6 C. IMPLEMENTATION Partnership arrangements (if applicable) Institutional and implementation arrangements... 7 Monitoring and evaluation of outcomeshesults Sustainability Critical risks and possible controversial aspects Loadcredit conditions and covenants... 1 D. APPRAISAL SUMMARY Economic and financial analyses Technical Fiduciary Social Environment Safeguard policies Policy Exceptions and Readiness This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.

4 Annex 1: Country and Sector Background Annex 2: Major Related Projects Financed by the Bank and/or other Agencies Annex 3: Results Framework and Monitoring Annex 4: Detailed Project Description Annex 5: Project Costs Annex 6: Implementation Arrangements Annex 7: Financial Management and Disbursement Arrangements Annex 8: Procurement Annex 9: Economic and Financial Analysis Annex 1: Safeguard Policy Issues Annex 11 : Project Preparation and Supervision Annex 12: Documents in the Project File Annex 13: Statement of Loans and Credits Annex 14: Country at a Glance... 67

5 INDIA RURAL ROADS PROJECT PROJECT APPRAISAL DOCUMENT SOUTH ASIA REGION SASE1 Date: August 16,24 Team Leader: Piers A. Vickers Country Director: Michael F. Carter Sectors: Roads and highways (1%) Sector Director: Vincent Gouame Themes: Rural services and infrastructure (P) Project ID: PO77977 Environmental screening category: A - Full Assessment Lending Instrument: Specific Investment Loan Safeguard screening category: S2 - Limited impact Project Financing Data [XI Loan [XI Credit [ ] Grant [ ] Guarantee [ ] Other: For Loans/Credits/Others: Total Bank financing (us$m.): 4 Proposed terms: Loan - VSL, 2 years to maturity, five years grace Credit - Standard Credit, 35 years to matwity,lo years grace INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Sub Total: PARTICIPATING STATES Total Borrower: GOVERNMENT OF INDIA

6 Responsible Agencies: Mr. S. Vijay Kumar, Joint Secretary, Ministry of Rural Development, Government of India, Fax No Mr. S. Negi, Principal Secretary, Public Works Department (PWD), Government of Himachal Pradesh, Shimla, India Fax No Mr. U.P. Singh, Secretary, Rural Development Department, Government of Jharkhand, Ranchi, Fax No Mr. H.L. Mina, Secretary, PWD, Government of Rajasthan, Jaipur, India Fax No Mr. A.K. Gupta, Principal Secretary, Rural Development Department, Government of Uttar Pradesh, Lucknow, India Fax No Expected effectiveness date: December 31, 24 Expected closing date: March 31,21 Does the project depart from the CAS in content or other significant respects?,vpc rk, Nn Does theproject require any exceptions from Bank policies? Re$ PAD D. 7 Have these been approved by Bank management? Is approval for any policy exception sought from the Board? Does the project include any critical risks rated substantial or high? Re$ PAD C.5 Does the project meet the Regional criteria for readiness for implementation? Re$ PAD D. 7 Project development objective Re$ PAD B.2, Technical Annex 3 [XIYes [XI No [XI No No The project development objective is to achieve broader and more sustainable access to markets and social services by the rural population in participating districts. No

7 Project description - Re$ PAD B.4, Technical Annex 4 The project has three components: 1. New Connection and Upgrading. Construction and improvement of about 9,9 km of rural roads that form part of the core rural road network in participating districts, including necessary environmental and social management measures, Resettlement and Rehabilitation (R&R) of any project affected persons, and technical review of rural road agency designs and supervision; 2. Maintenance of Core Network. Annual implementation of periodic and routine maintenance programs of the remaining core rural network (about 1, km) in participating districts; and 3. Institutional Development. Technical assistance and goods to: (a) participating rural road agencies to help them plan, procure, supervise and report on their maintenance programs, including environmental and social management; (b) local contractors for training in planning, technical and environmental areas; and (c) to the MORD to further strengthen its capacity in program management, particularly in the areas of environmental, social, financial and procurement management as well as poverty impact assessment. Which safeguard policies are triggered, if any? Re$ PAD D.6, Technical Annex 1 Environmental Assessment Natural Habitats Cultural Property Involuntary Resettlement Indigenous Peoples Forests Significant, non-standard conditions, if any, for: Re$ PAD C.6, Page 1 Board presentation: None Loadcredit effectiveness: None Covenants applicable to project implementation: See para C6, Page 1

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9 A. STRATEGIC CONTEXT AND RATIONALE 1. Country and sector issues An estimated 3, habitations out of the 825, habitations in India are without all weather road access. While some states have relatively high reported levels of connectivity, the rural population of ten states - Assam, Bihar, Chattisgarh, Himachal Pradesh, Jharkhand, Madhya Pradesh, Orissa, Rajasthan, Uttar Pradesh and West Bengal - suffer from poor physical access due to lack of all weather roads. This constrains economic activities in rural areas and prevents the rural population, who constitute the majority of India s poor, from being filly integrated into the economy and accessing essential services. Rural road management requires adequate planning, survey and design, good coordination between multiple hnding streams and an efficient decision making process. Although there has been substantial investment over the years, an adequate rural road network has still not been achieved. Current low levels of access are partly a result of a lack of adequate maintenance on the existing large rural road network of approximately 2.7 million km. More resources are often steered towards new construction rather than for preserving existing roads. The little money that is allocated for maintenance has often been poorly utilized due to an absence of proper planning and implementation and lack of the application of a core network policy. As a result of poor maintenance practices, the development outcomes from the substantial rural road investments in the past have been far less than expected. Progress in decentralization of rural road management has also been slow. The responsibility for managing rural road networks typically overlap or is divided between several agencies - Public Works Departments, Rural Development Departments, Forest, Irrigation and various other Agriculture Departments as well as local government bodies. This reality is often not in tune with the decentralization policy of the country. Constitutionally, the management of rural roads was entrusted to the Panchayat Raj Institutions (PRIs), the three tiers of local governing bodies, after the passing of the 73rd Amendment to the Constitution in State governments should enact state level legislation to ensure implementation of the decentralization policy. Yet, almost all state governments retain ownership of the majority or all of the low volume roads in their states and their field staff report to officials in state capitals rather than to those locally appointed or elected. This leads to diffused accountability for the condition of the rural road network. The rural road sector also suffers from relatively low levels of technical capacity in many areas due to poor human resource management and often weak career prospects as a result of overstaffing, frequent transfers and lack of specialization. As a result, many rural road agency field engineers need to upgrade their technical and contract management skills and more specialized staff such as for procurement, environment and social management need to be A habitation is defined under the Program as a cluster of population, living in an area, the location of which does not change over time. The population of all habitations within a radius of 5 meters (1.5 km of path distance in case of hill areas) is added together for the purpose of determining population size. The cluster approach enables provision of connectivity to a larger number of habitations, particularly in hilly or mountainous areas. The three tiers of local government are the district, sub-district (block) and village levels.

10 inducted into agencies. Low levels of technical capacity hinder the ability of road agencies to absorb new investment funds as well as prevent better maintenance. Central Government Strategy. To address the poor rural accessibility in a more systematic way, the Prime Minister s Rural Road Program (Pradhan Mantri Gram Sadak Yojana, PMGSY) was announced in late 2. The PMGSY sought to achieve all weather access to every habitation with a population greater than 1, by the end of 23, and all habitations of greater than 5 people (25 people in hill states and tribal areas) by the end of 27. The Ministry of Rural Development (MORD) has been tasked with designing the program strategy and overseeing actual implementation by states and district bodies. The PMGSY seeks not only to contribute to increased levels of connectivity but to significantly improve the planning and management of rural roads3. While not meeting its ambitious first phase targets, the PMGSY has made good progress in its first three years of implementation. Of the 64,8 habitations of population 1, and above unconnected as of December 2 which were planned to be connected by the end of 23, works on 22,1 are either completed or close to completion. The program has also finded the works for connecting another 24,3 habitations with populations of less than 1,. The program has not been able to meet the target as defined in the policy statement mainly due to the shortfall in the availability of funds as well as the implementing capacity constraints of road agencies and contractors. Moreover, there remains a challenge to develop an effective government strategy in addressing the issue of inadequate maintenance on rural roads. Some indicators of PMGSY implementation perfonnance in four states are shown in Table 2 of Annex 1. Funding Gap. The most recent estimate suggest that the total investment required to meet the PMGSY targets is of the order of Rs.1,3 billion (US$28.9 billion). In 1999, a one rupee cess (2.2 US cents) on every liter of diesel and petrol sold was imposed by the Government of India This was further increased by a half rupee in FY In 2, a Central Road Fund (CRF) Act was promulgated to direct the resources obtained through this cess to the improvement of national and state highways as well as rural roads. By law, 5 percent of the diesel cess is directed towards rural road development, a sum amounting currently to about Rs.3 1,5 million (US$7 million) per year, about one third of total CRF revenues. While the timeframe for completion of the PMGSY is currently being re-evaluated in the light of the latest estimate of the total requirement, any reasonable timefi-ame will require substantially more funds than available through the cess. The MORD is therefore seeking domestic and external borrowing to deliver the program. 2. Rationale for Bank involvement The Bank has had a constructive dialogue with the MORD in the development and refinement of the PMGSY since its inception, including in the areas of the adoption of a core network approach to concentrate resources, quality management processes, road design, procurement and financial management procedures and the beginnings of a real national debate on rural road maintenance. See guidelines available at 2

11 At present, the allocation process of the PMGSY is driven largely by the need to meet the Program s connectivity targets in as equitable a way as possible. Allocations and disbursements to states are based on investment need, plus a loose mechanism that seeks to link funding to indicators of performance under the PMGSY. PMGSY guidelines do state that specification and enforcement of a satisfactory mechanism to promote funding and other assistance for the proper maintenance of PMGSY assets is key to the program. The guidelines also speak of maintenance of the entire core rural roads network. However, no corresponding mechanism for linking PMGSY funds to implementation of maintenance of the whole core rural roads network exists. Yet, sound overall rural road management is essential if the PMGSY targets are to be met. For example, States may find themselves building new roads only marginally faster than existing roads deteriorate due to lack of maintenance. As a centrally sponsored scheme, the Government of India (GOI) has yet to find a means to effectively link the substantial increase in resource transfer presented by the PMGSY to encourage better asset management. The Bank, as an independent external financier with a reputation for insisting on sound asset management, can introduce through the project the notion of partly linking PMGSY grants to sound management on all the core rural road network. The project seeks to facilitate sector planning and management reforms in participating states. In addition, the approach being proposed under this project o f collaborating with the MORD at a national level rather than merely working at the state level provides the additional opportunity for scaling up reforms across the country. By demonstrating the value of sector reforms in pilot states or districts in a partnership with the GOI, the likelihood that similar reforms are implemented as a result of GOI s own funding through PMGSY is greatly enhanced. Finally, the GO1 has set itself ambitious connectivity targets that require substantial additional resources if they are to be met on time. The Bank, both through IDA and as needed through IBRD, has the financial capacity to contribute to the public investment in this huge public good. 3. Higher level objectives to which the project contributes The PMGSY is one of the key investments laid out in the transport chapter of the GOI s Tenth Plan4. This highlights the importance of reducing the disparities in physical access in rural areas, the need to shift management responsibilities to local government as well as adequately fund rural road maintenance, and identifies the likelihood that external borrowing will be required to deliver the program to time. The project is consistent with the Bank Group Country Assistance Strategy (CAS, Report No IN) discussed by the Executive Directors on December 5, 21 and the new CAS is due to be discussed on August 26, 24. The project will strengthen the enabling environment for development and poverty reduction by accelerating rural growth. The proposed project is expected to contribute to the CAS objective for poverty reduction in India through two channels, First, the proposed rural road improvements will contribute to the development of economic activity in project areas by enhancing mobility and thus providing more opportunities for employment, trade, specialization and growth within the rural economy. Second, improved rural roads will provide better physical access to basic services and thereby increase the quality of life of the poor in the project influenced areas. See lim,:i~w~w.plan~iitiscommiss~on.nic,i~ ~lanslplanrel~five~~l Oth volunie2iv2 ch8,,,-3.pdf 3

12 This project is being proposed as the first in a series of credits/loans to support the Government of India's program of total rural connectivity over the next five to seven years. B. PROJECT DESCRIPTION 1. Lending instrument A Specific Investment Loan (SIL)/Credit has been chosen for this first investment in the PMGSY. The rationale for this choice is that while as an ongoing GO1 program the PMGSY offers the opportunity for a Sector Wide Approach (SWAP), there are some remaining procedural differences between Bank and GO1 financed road sub-projects that are currently being reduced with the expectation of full harmonization in the future. Moreover, the desire by all parties to focus on the least connected states and districts requires a focusing of resources that can be achieved through a SIL. Other instruments may be explored for subsequent Bank funding of the Program. For the IBRD portion of the Loan, the Borrower has chosen the financial terms on the basis of their expectations of future exchange and interest rate changes. Given the large shortfall in the current PMGSY financial plan, the size of financial support has been determined principally by state implementing agency capacity to disburse funds effectively and efficiently taking into account the likely funding flows that GO1 will make available to these states over the project period. 2. Program objective and Phases The PMGSY is a 1% centrally sponsored scheme implemented by state agencies under the overall supervision of the Ministry of Rural Development that seeks to achieve all weather access to every habitation with a population greater than 5 people in plain areas and a population greater than 25 people in hill, desert and tribal areas. The estimated cost of the program is about Rs. 1,33 billion (US$28.8 billion). The PMGSY has been running for three years and has so far connected about 35, habitations across the country. Details on the management, planning and implementation of the program are available on line5. This project is being proposed as the first in several credits/loans to the Government of India to support the implementation of the PMGSY. This first project will provide funds, additional to existing Government of India transfers, to 6% of the districts in four of the most poorly connected states - Himachal Pradesh, Jharkhand, Rajasthan and Uttar Pradesh. The scope of the project may be expanded to cover additional districts at the request of the Government of India and in agreement with the Bank, subject to satisfactory performance in implementation. The scope of the project may also be expanded to cover additional poorly connected states (e.g. Bihar). Subsequent lending may be in the form of a SWAP subject to a agreements being reached in a number of policy and operational areas between the Government of India, recipient states and the Bank as outlined in Annex 1. See 1ittp:iiwww.pniesv.nic.in 4

13 3. Project development objective and key indicators The project development objective is to achieve broader and more sustainable access to markets and social services by the rural population in participating districts. The indicators that will be used to measure performance in achieving the development objective are (see Annex 3): (i) percentage of eligible habitations in project areas with all weather access to social services and markets; (ii) percentage of through routes in the core rural road network in participating districts in fair or better condition; and (iii) level of stakeholder satisfaction with rural road network in participating districts. Baseline data for the first two indicators have been collected and for the remaining one efforts are under way to collect data. 4. Project components The table below shows the project components and associated financial estimates. Annexes 4 and 5 provide further details on each major component. I 1. New connection and upgrading 4. Incremental operating costs for new construction I I I 88.7 I 1. _- - I I I I I I I 4.5 I.2 2. Maintenance of core network I. I. I. I. I 236. I 99.4 I 3. Institutional development I 13.6 I 12.1 I 3. I 1.5 I 3. I Front end fee Total o 1.o P Lessons learned and reflected in the project design The project design has benefited from experience gained from previously Bank financed projects as well as progress in implementing the PMGSY to date. The following key lessons are reflected in the project design: (i) state government commitment to adequately fund and undertake rural road maintenance is essential for sustainability; (ii) focused investments over a manageable area are more effective and create more impact than thinly spread investments over a lager area; (iii) there is considerable scope for reducing construction costs through adopting optimal design standards and promoting the use of local materials specially for low trafficked rural roads; (iv) independent monitoring of quality of road designs and construction is effective in enhancing the quality of construction; (v) a reliable and comprehensive data-base is essential for making sound investment decisions and promoting improved management of rural roads; and (vi) capacity building and training of implementing agency staff in all aspects of rural road management is crucial for project implementation. 5

14 6. Alternatives considered and reasons for rejection Alternative project areas - selection of states and districts. Four states - Himachal Pradesh, Jharkhand, Rajasthan and Uttar Pradesh - have been identified by the GO1 and Bank as recipient states based on their low levels of connectivity for inclusion under the loan. However, other states may also receive funding, provided they subscribe to the preparation and implementation process prescribed for this project. To focus resources, Bank funding will be limited to a maximum of the most poorly connected 6% of districts. Alternative mechanisms to impose incentives on states to reform. The GO1 and Bank are keen to see that Bank financial support acts as a lever or catalyst for state reform of the rural road sector. A portion of the loadcredit is to be allocated between states on the basis of performance. The structure o f this mechanism is shown in Annex 4. The MORD has stated its intention that the Bank funds will be entirely incremental to GO1 funds. In other words, GO1 funding for these states, over the project period, will remain in the same proportion as currently made available and Bank funds will not replace GO1 funds. Alternative types of rural road works. The PMGSY guidelines state that the intention of the program is to focus on achieving broader connectivity of the rural population through primarily new rural road construction. Upgradation (widening andor changing the surface type) of existing roads (eligible under PMGSY) and rehabilitation (rebuilding to original design standard which is not eligible under PMGSY), although at times critical to the utility o f new village connections and with higher rates of return, are accorded lower priority in the current guidelines. However, core rural road networks in each district have been prepared and endorsed by state governments. While Bank funds, along with GO1 funds, will focus on new construction and upgrading, State funds for rehabilitation and maintenance are programmed to complement these transfers such that a whole of core network approach is achieved. Alternative implementation arrangements. Alternative implementation arrangements have been considered in designing the project. The existing arrangements as applied on the PMGSY will be largely used for the Bank financed project, with two major changes. First is the introduction of a strengthened independent review of key aspects of the sub-project cycle. This is to be achieved through commissioning by each state of multi-disciplinary teams of independent technical examiners to monitor all technical, financial and safeguard aspects of subproject screening, design and supervision. Second, technical assistance is to be provided to these four states to help prepare and implement complementary state funded rehabilitation and maintenance programs. C. IMPLEMENTATION 1. Partnership arrangements (if applicable) At the end of 23, the Asian Development Bank (ADB) committed US$4 million of support to the PMGSY in two of the most poorly connected states (Chattisgarh and Madhya Pradesh). ADB intends to support the PMGSY in up to a further three o f the least connected states, probably during 25. The financing by both ADB and as proposed under this Bank project are essentially parallel funding streams although implementation arrangements for GOI, ADB and Bank financed roads are substantially the same. 6

15 2. Institutional and implementation arrangements There will be four main implementing agencies for this project consisting of the State Rural Road Development Agencies (SRRDAs) of the four states working through their respective government departments (Public Works Department of Himachal Pradesh, Rural Engineering Organization of Jharkhand, Public Works Department of Rajasthan, Public Works Department of Uttar Pradesh and Rural Engineering Service Department of Uttar Pradesh). In addition, the National Rural Road Development Agency (NRRDA) will also implement some small consulting and training activities. The detailed implementation arrangements are set down in an Operational Manual for the PMGSY as a whole as well as a Supplemental Operations Manual for Bank funded activities. More detail is available in Annex 6. At the central level, the MORD is responsible for overall oversight and coordination of the PMGSY and all components of this project. The MORD team is headed by a Joint Secretary with a small number of largely non technical support staff. In 22, the MORD established NRRDA as a registered society. The purpose of the NRRDA is to monitor progress and to act as a repository of technical expertise and has increased its staffing more recently to reflect the increasing workload under the program. The MORD has constituted a Inter-ministerial Empowered Committee, chaired by the Secretary MORD, to sanction state sub-project proposals. New Construction Component. At the State level, the agencies noted in Table 1 in Annex 6 are responsible for various aspects of the PMGSY. The nodal departments play a coordinating role only and provide secretarial support to state level Empowered Committees, chaired by respective Chief Secretaries. The SRRDAs as the implementing agencies are responsible, though the field divisions of respective road agencies, for preparing, procuring and supervising PMGSY works which are to be undertaken through competitive tendering to private contractors. State Technical Agencies (STAs) are responsible for vetting project reports. Each implementing agency has created specific Program Implementation Units (PIUs) in each district to implement the PMGSY program and the same units will be responsible for the Bank finded sub-projects. The SRRDAs will be responsible for procuring and managing consultants to undertake independent technical review of works under this component. Maintenance Component. The same agencies will be responsible for implementing the maintenance component through both force account for routine works (in HP, Rajasthan, Jharkhand and UP) and the private sector for periodic works. Institutional Development Component. All central and state implementing agencies will be involved in this component. Consultants will be selected by state implementing agencies to support the development of state and district capacity to manage and finance maintenance programs. The NRRDA will hire consultants as necessary to fulfil specific research, monitoring or other technical needs. Funds Flow. The PMGSY guidelines of January 23 set out the financial and funds flow arrangements for the program which will also be applicable to Bank funds. The PMGSY is budgeted as a single line item on the MORD s Plan account. Funds from the MORD to States flow through regular banking channels outside the treasury system of the concemed state government. Funds are released in two more or less equal installments per year and after the first tranche, utilization certificates are submitted by the State for releasing subsequent tranches. A 7

16 state level autonomous agency (SRRDA) has been set up in each state that will hold, account and report for the funds released under the program. 3. Monitoring and evaluation of outcomedresults The MORD has already put in place the basic structure for a solid monitoring framework based on continuous project implementing unit reporting of key physical and financial data captured and disseminated through a web-based On-line Monitoring and Management System (OMMS). This is available for public viewing online ( The system adds considerably to transparency in the program and the quality of the data is fairly robust. This project will add one additional layer to this monitoring and evaluation system that seeks to demonstrate the impact on poverty that the program is achieving. 4. Sustainability The main measure of sustainability of the project investment is whether the rural roads financed under the project remain all weather roads and with a satisfactory riding quality for the duration of their design lives of ten years - this will be dependent on their design, construction and maintenance. Furthermore, for rural accessibility to increase in the project areas overall, the maintenance component on the existing core rural road network needs to be implemented satisfactorily. The physical sustainability of project investments will be ensured through: (i) sound design and construction according to appropriate standards; and (ii) motivating the establishment and use of effective maintenance regimes. Technical monitoring consultants will oversee compliance to specification during design and supervision. The GO1 and Bank funded contracts under PMGSY include a five year maintenance program to be implemented by the contractor who carried out the main contract and this is to be financed by the respective state. A portion of Bank funding for PMGSY is contingent on adequate state and local implementation of an agreed maintenance regime on their core networks in project areas. Technical assistance at national, state and district levels will seek to build capacity in critical areas. At the national level, there are many indications that the GO1 and MORD are committed to the efficient and effective implementation of the PMGSY on schedule: a imposition of a new cesses on fuel to raise resources for the PMGSY in 1999 and 23 and subsequent expenditure of about $2.2 billion to date on delivering the PMGSY over the last four years; e about 33, separate road links with value of about Rs.13,5 million are under implementation of which about 13,5 road links are complete totalling approximately 2, km of roads with a further 3, km under construction; a preparation and use of detailed planning guidelines and a Rural Roads Manual, with a focus on a core rural road network approach to help prioritize all forms of spending on rural roads; a enforcement of a three tier quality supervision and monitoring mechanisms; a application of standard procurement procedures and financial management system; e substantial progress with establishing an OMMS with nine modules covering all aspects of the PMGSY and available to the general public through the web; and 8

17 e release of PMGSY funds to states has at least partly been determined by state performance. These actions have meant that the PMGSY has already introduced a much higher standard of technical and financial management into parts of the sector. Moreover, recently the MORD has increasingly shown commitment to use the PMGSY where possible to address the problem of rural road maintenance. The MORD has hosted three regional maintenance workshops to help prepare a generic rural road maintenance policy for adaptation and endorsement by states and are now considering ways in which the PMGSY funds can influence states to take maintenance more seriously. The following indications of commitment have been demonstrated at the state level: each state has a dedicated project team at HQ to look after the PMGSY including the Bank funded portion; e all four State Governments endorsed a Project Preparation and Implementation Framework in early 23 that sets down the basic objective, elements and performance monitoring mechanisms for the provision of Bank funds to the PMGSY; and e State Governments have approved State level maintenance action plans that seek to address in a comprehensive manner the current deficiencies in policy and practice and find ways to adequately finance maintenance. 5. Critical risks and possible controversial aspects Risk ~ To Development Objective States and local governments do not allocate sufficient resources to maintain longer network either because States' fiscal situation deteriorates or for other reasons. Absence of implementation of measures to enhance human resource management in areas of transfers, skills specialization and personal accountability in rural road agencies. Significant environmental damage or negative social impacts during or after construction due to poor implementation of Environmental Social Monitoring Framework (ESMF). GO1 and Bank funds for PMGSY crowd out and displace state and district funding and implementation capacity for rural roads. GO1 commitment to PMGSY declines. Risk Mitigation Enforce mechanism that links Bank finding for new construction to State funding for maintenance. Include techcal assistance to help rural road agencies to undertake institutional reform. Link with other Bank initiatives at State level where available. Proper monitoring and enforcement of safeguard management measures. Establish standing coordination committees between key departments. Careful monitoring of all funding flows to sector. Agreement with GO1 and States on level of additionality brought by Bank funds. Potentially high impact but low probability risk. Bank can revert to worlung directly with interested States in sector. Risk Rating after Mitigation S S M M M 9

18 Risk To Component Results Irregular or insufficient flow of project funds. Rural road agency staff design road works poorly or use standards that are not cost effective or environmentally sound. Industry/supply side constraints, particularly if GO1 funding increases substantially. Delayed or improper procurement by rural road agencies. Risk Mitigation Design and implement sound FMS and disbursement procedures. Dedication of adequate and trained staff for FM at state level. Training of staff. Independent technical review of designs. Training of contractors and well considered contract packaging and qualification criteria. Training of staff. Enforcement of usual Bank remedies where necessary. Overall Risk Rating Risk Rating after Mitigation M M S M M 6. Loadcredit conditions and covenants LOANKREDIT The Borrower shall: Implementation - Ensure that the Project is implemented in accordance with the Supplemental Operations Manual. Utilization of Funds Allocate funds between participating states for (i) phase 1 of the project on the basis of the criteria adopted for the PMGSY as a whole and (ii) phase 2 of the project on the basis of the weightages, performance indicators, targets, and verified achievements thereof as agreed with the Bank. Monitoring, review and reporting Maintain adequate staffing for management and monitoring of the project. a Provide to the Bank Quarterly Progress Reports within 45 days of the end of each calendar quarter. Make public three times during the project a poverty impact report, using a terms of reference acceptable to the Bank, the first such report being the baseline by March 25, the second such report by March 27 and the last report by March 21. PROJECT Participating states shall: 1

19 Accounts (a) Maintain throughout the project period: (i) a finance manager with experience and qualifications acceptable to the Bank in each participating SRRDA; and (ii) accountants within each PIU receiving Bank funds; and (b) install by September 3, 25 and thereafter maintain in each PIU receiving Bank funds a computerized financial management system. Management e Maintain a state level Standing Committee to oversee implementation and make policy decisions; SRRDAs to receive and administer funds. Ensure that the SRRDAs and PIUs have adequate and experienced staff. Monitoring, review and reporting Create and maintain a separate budget line item or line items for rural road maintenance that allows for the monitoring of the rural road maintenance component. Make public: (i) annual asset condition reports, and (ii) annual maintenance plans for the core rural road network for every participating district, with content and methodology satisfactory to the Bank - first reports by February 28, 25 and every February thereafter. Implementation Implement the project in accordance with the Supplemental Operations Manual. Implement the annual rural road maintenance plans in participating districts. D. APPRAISAL SUMMARY 1. Economic and financial analyses The PMGSY program does not apply any specific economic criteria in the selection of roads. However, the program does mandate a broad prioritization by habitation size through the application of a comprehensive priority list in each district. Investments in the program are then taken purely in order of this list so the more populated communities and therefore those roads more likely to generate traffic, get connected first. To strengthen the appraisal of this aspect of the PMGSY, the Bank undertook a study to estimate the economic benefits of providing all weather access roads to different villages in the four selected States to determine the appropriate level of design standard (investment) which would be expected to have acceptable economic returns. The approach used in the selection of roads and their design standard, to be funded through this loan, is therefore a mix of the economic analysis and cost effectiveness criteria. On the basis of the analysis, the median economic rate of return for individual sub-projects is around 28% (17% if the modified economic rate of return is applied using 12% as both the cost of capital and the reinvestment rate). More detail is available in Annex 9. Financial Sustainability. The PMGSY program is a fully GO1 sponsored scheme so its financial sustainability depends on the willingness and ability of GO1 to raise and allocate funds to effect its delivery. Current estimates suggest that the total investment required to meet the targets is about US$29 billion, or several US billion per year if it is to be delivered in any 11

20 reasonable timeframe. These are substantial resource requirements and are unlikely to be feasible for the immediate future. The GO1 expects to fund a significant portion of this through a dedicated levy on diesel which raises about US$7 million per year, other transfers from the consolidated fhd as well donor assistance, including this and subsequent Bank funded projects. The MORD is taking steps to find ways to lower the unit costs of new roads and thereby reduce the overall program cost. Nevertheless, there is still a need to use borrowing to spread the costs of this investment over a longer timeframe. Fiscal Impact. During a five year routine maintenance period, which includes the constructioddefects liability period, State governments are contractually committed to fund the maintenance of project roads. The incremental fiscal impact on the State governments of the new roads financed under this project are modest in themselves (see Table 8 in Annex 9). However, in aggregate the fiscal impact of the PMGSY is quite large, and this project seeks to help find ways to more reliably and effectively finance the upkeep of state core rural road networks. 2. Technical Project Selection. PMGSY guidelines require preparation of core network plans, which ensure one all-weather road connection from each habitation to nearby market centres. The roads under PMGSY are to be selected from these core network plans. All the proposed recipient states have prepared core network plans including a prioritized list defining relative priority for constructiodupgrading of each road under the core network. Road improvements funded under this project will form part of the core network. Road Designs. Most of the rural roads under the project involve upgrading of existing earthen-tracks to single lane rural roads with or without a thin bitumen surface depending upon the traffic and climatic conditions. Some upgrading of existing rural roads is also involved. PMGSY guidelines specify the use of the Indian Roads Congress Manual for Rural Roads (IRC SP 2) for the design of all rural roads. Bank funded roads will follow SP 2. Maintenance Management. Each of the participating states have established some form of computerized database for the core network and prepared a maintenance plan defining the routine, periodic, and special maintenance requirements for the core network roads in participating districts. Technical assistance will further enhance this database, link it to a simple maintenance management system and will help introduce proper procedures to plan, program, budget, prioritize, design, and execute maintenance works. 3. Fiduciary Current Procurement Procedures for PMGSY. Currently, PMGSY works are being procured by all states using a largely standardized procurement and bidding document process established by the MORD for application on the program. Road works are being tendered by executing officers of designated implementing agencies at a district level through competitive bidding in packages of roughly Rs.1 Cr. to Rs.5 Cr. (US$2, to US$1 million) with provision for package and slice. The packages typically include several roads which may be geographically dispersed. 12

21 The use of a standard bidding document (SBD) for works under the PMGSY as a whole is being required by the MORD. The standard bidding document in use on the PMGSY has many of the same provisions as the Bank's NCB standard bidding document for works in India, called the W2. However, there are some differences. Accordingly, the MORD has prepared a second version of its standard bidding document that more closely matches the W2 and will be used for Bank financed works. This may be revised after some experience in procurement and implementation. Procurement arrangements are shown in Annex 8 and have been laid out in a procurement plan prepared by the Borrower and agreed with the Bank. Procurement Capacity. Institutional capacities vary somewhat across the states. The five implementing agencies included under this project have demonstrated adequate capacity to procure low value NCB works contracts. However, their staff, plus the staff at the NRRDA, are less familiar with the procurement of larger service contracts as envisaged under the project. Accordingly some staff from each of the implementing agencies have attended procurement training. Separate training on contract administration will be provided under the technical assistance and technical examiner consultancies. Overall, procurement capacity is satisfactory given the nature of work. Financial Management (FM) Capacity. In the past, the proposed recipient road agencies have been using their traditional accounting systems which primarily focus on book keeping, and not particularly on financial management. The FM procedures are being updated to make them more effective as a management tool under the program as a whole. FM arrangements under the Bank project are hlly mainstreamed and centered around the PMGSY's existing arrangements wherein recently created societies (SRRDAs) receive project funds, incur project expenditures, account for them and provide financial reports to stakeholders. Additional staffing is being provided at both HQ and district implementing units. The PMGSY Operational Manual and a Supplemental Operations Manual for Bank funded projects set down the FM arrangements. Financial Management System. The MORD plans to ensure implementation by States of an upgraded Financial Management System for PMGSY in phases starting with a manual system and thereafter graduating to a computerized system. The pace of implementation of the computerized FMS has been slower than the MORD had anticipated for a variety of reasons including lack of a reliable web connection. Overall, this project is expected to have a financial management system which should be able to adequately account for project resources and expenditures and which will be upgraded to a computerized system during the first year of the project (see Annex 7 for more detail). 4. Social Impact on people and land. The findings of an Environment and Social Assessment (ESA) conducted in all Participating States indicate that the PMGSY has caused limited negative impacts on people to date, largely restricted to modest loss of land from widening of existing tracks. By and large people have been only marginally affected due to improvement in the design. No evidence has been found of people being displaced under the scheme as construction has been restricted to the available width in settlements. Similar low impacts are expected for the remainder of the program, part of which is to be funded by the Bank. See Annex 1 for more detail on social issues. 13

22 Management of Risk. An Environment and Social Management Framework (ESMF) prepared for this project provides overall guidance for the integration of social issues at each stage of the project cycle. A safeguard instrument, a state specific Resettlement and Participatory Framework (R&PF), has been prepared to address the diverse nature of socioeconomic and legal conditions in each state. The objective of these frameworks is to establish systems for communities to participate in the decision making process of planning, implementing and monitoring sub-projects that directly benefit them. Any necessary transfer of land and implementation of mitigation measures will be completed before initiation of civil works. Independent technical examiners will review the sub-projects on a sample basis to ensure compliance of the framework. Opportunities for community planning. The participation of stakeholders is envisaged at different levels, i.e. Center, State, district, block and village level to involve various government departments (revenue) and Panchayati Raj Institutions (PRI), including the project affected people. The objective of this broad participation is to enhance the overall design of the subprojects as well as establish realistic roles and responsibilities through the screening and consultative framework developed for the project. The process has been applied to selected subprojects to be implemented in the first year of the project and designs were accordingly finalized. Monitoring. The framework includes specific monitoring indicators for outputs and performance of social issues. A safeguard specialist of the technical examiner team will periodically monitor the progress of implementation. In addition, PIUs will be responsible for regular monitoring and preparation of quarterly progress reports. Planned social development outcomes. The project aims to achieve: (i) greater social inclusion due to improved physical access to markets and services; (ii) increased equity between areas by focusing on less well served states and districts; (iii) making rural road agencies more accountable to their local constituents; (iv) mitigation of any potential adverse impacts arising out of the project; (v) improved participation of members of the PRIs in the decision making process with the implementation of state specific Panchayati Raj Act and Panchayati Raj (Scheduled Area Act); and (vii) greater transparency through implementation of the Right to Information Act Environment Environmental Issues. The following are the likely environmental issues during the construction phase: (i) material management such as borrow area and quarry operation; (ii) location and operation of hot-mix plants and constructiodlabor camps; (iii) disposal of debris and bituminous waste; and (iv) embankmenthlope stability. These can become significant in the project if not addressed appropriately at various stages. In addition, some roads may traverse through forests or other protected or ecologically sensitive areas to provide connectivity to interior villages and habitations. Stability of cut slopes for new or widened roads and the disposal of debris are a key concern in hilly areas such as those in Himachal Pradesh, parts of Jharkhand and Rajasthan. Assessment Approach. A survey was carried out in a sample of districts of the four states to: (i) assess the current standards of environment assessments being carried out in PMGSY sub-projects; (ii) assess the policies and operational procedures to address, mitigate and manage environment issues and identify areas that need modificatiodstrengthening; (iii) 14

23 recommend process enhancements in the preparation (planning and design), and (iv) recommend environmental capacity augmentation. Based on this, an Environmental and Social Management Framework (ESMF) was developed. The ESMF comprises of: (i) a screening and consultation framework; (ii) standard Environmental Codes of Practice (ECOPs); (iii) a resettlement policy framework; and (iv) a tribal development strategy. The ESMF has been integrated into the project operations to help mitigate adverse impacts, enhance positive ones and comply with the Bank s policies and GO1 regulatory requirements. The ECOPs aim to standardize the environment management approach within the implementing agencies. Environment Management. The ESMF helps to minimize the need for sub-project level EAs and Environmental Management Plans (EMPs) by mainstreaming environment issues in the selection, planning and design of sub projects. The screening framework in the ESMF determines the magnitude of environmental and social issues at the sub-project level with respect to the location and sensitivity of the sub-project, the application of the Bank s Safeguards Policies and GO1 and State level regulatory requirements. The application of the ECOPs will help to mitigate adverse impacts and enhance positive ones. The ECOPs have been developed for construction camps and site operations; tree plantation and roadside vegetation; erosion control and slope stability; quarry development, operation and rehabilitation; drainage and flood prevention; protection of chance find cultural properties; waste management and site redevelopment; additional measures for roads through forest areas, wildlife and natural habitats, swamps, hills and undulated terrain, sand dunes or lakes. Implementation Arrangements. Implementation of the ECOPs will be the responsibility of officers of the executing agencies in each state under the overall co-ordination and monitoring of the SRRDA. The Supplemental Operations Manual integrates the ECOPs into project operations. To implement measures beyond the jurisdiction of the executing agencies, such as land acquisition, plantation along the road sides, mining for stone, sand and gravel, Memoranda of Understanding are being signed between the executing agencies and relevant line agencies, as necessary. Specific responsibilities of these line agencies have been indicated in the ESMF, depending on technical capacity or jurisdiction. Participation. The ESA was carried out in a participatory manner involving all stakeholders including affected communities, staff of executing agencies and line departments. The Screening and Consultation Framework (part of the ESMF) was prepared on the basis of these consultations. It includes an information dissemination strategy, collaborative and participatory mechanisms between communities and 1ocaVproj ect authorities, a mechanism for ensuring continued consultation, and a strategy for local oversight of the project. Workshops were also held with the technical officers in each State to discuss the content and utility of ECOPs. Monitoring and Evaluation. The ECOPs includes environmental monitoring indicators to measure environmental performance. Institutional arrangements and budgeting have also been indicated. Independent Technical Examiners will report on environmental performance. Disclosure. The MORD disclosed the draft ESMF through its web site and issued press notifications inviting public comments on the ESMF during March 24. The final version was placed on the website in July. In August 24, the States disclosed a Hindi version of the ESMF summary in project areas through local public offices. 15

24 6. Safeguard policies Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OPBP/GP 4.1) [XI [I Natural Habitats (OPBP 4.4) [XI [I Pest Management (OP 4.9) [I [XI Cultural Property (OPN 11.3, being revised as OP 4.11) [XI [I Involuntary Resettlement (OP/BP 4.12) [XI [I Indigenous Peoples (OD 4.2, being revised as OP 4.1) [XI [I Forests (OP/BP 4.36) [XI [I Safety of Dams (OPBP 4.37) [I [XI Projects in Disputed Areas (OP/BP/GP 7.6)* [I [XI Projects on International Waterways (OP/BP/GP 7.5) [I [XI OP 4.1, 4.4, 4.36, The Environmental safeguard category of the project is A. An environment assessment has been undertaken and a suitable management instrument prepared with provision for additional site specific management plans (EMPs) to be prepared and remedial measures applied in sensitive areas as necessary. The ESMF and any EMPs are to be implemented on sub-projects by the executing agencies. Technical Examiners will monitor compliance by state executing agencies and contractors to the provisions of the ESMF. OP 4.12 and OD 4.2. The Social safeguard category of the project is S2. The R&R and the consultative framework have been prepared to address safeguard concerns at preparation and implementation of sub-projects. Independent Technical Examiners shall ensure compliance with the consultative framework. 7. Policy Exceptions and Readiness No policy exceptions are being sought. The project provides additional funding to an ongoing established program already hctioning satisfactorily. Preparation of sub-projects of value equal to about one third of the Loadcredit are substantially advanced and tendering of this amount is expected before the time of effectiveness. Procurement of key consultancies is underway in all states. * By supporting the proposedproject, the Bank does not intend to prejudice the$nal determination of the parties' claims on the disputed areas 16

25 Annex 1: Country and Sector Background INDIA: Rural Roads Project MAIN SECTOR ISSUES Low Levels of All Weather Motorized Rural Access. An estimated 3, habitations (about 4 percent of the 825, habitations in the country) are without all weather road access. While some states have relatively high levels of reported connectivity (e.g. Haryana, Punjab), ten states (Assam, Bihar, Chattisgarh, Himachal Pradesh, Jharkhand, Madhya Pradesh, Orissa, Rajasthan, Uttar Pradesh and West Bengal), have poor access to all weather roads. This constrains economic activities in rural areas, and prevents the poor from being hlly integrated into the structure of the country's economy and accessing essential services. Table 1 provides an indication of the scale of the problem faced by the four states proposed for Bank financing. Total No. of Habitations Total No. of Unconnected Habitations Total No. of Habitations connected to date under PMGSY I Himachal Pradesh 16,997 11, Jharkhand Raiasthan Uttar Pradesh 141,534 66,553 Total No. of eligible Habitations remaining to be connected under PMGSY 31,125 18, ,352 4,567 2,728 2,28 1 6,52 5 2,546 2,45 21,75 17

26 assets has yet to develop. Local political incentives means more resources are steered towards new construction rather than for preserving existing roads. The little money that is allocated for maintenance is poorly utilized due to an absence of proper planning, including a failure to focus on the core network, and inefficiently delivered works. National government agencies have so far not paid enough attention to this problem, seeing it as constitutionally outside their mandate. The majority of the rural road network in the country is under the nominal ownership of state PWDs or Rural Development Departments (RDDs), whose staff generally do not have a large incentive to prioritize maintenance. Thus, there is a critical need to recast the organizational and incentive structures to promote adequate maintenance of the rural road network. As a result of poor maintenance, the development outcomes from the substantial rural road investments in the past have been far less than expected. Given the size of the PMGSY resource transfer, it represents an excellent opportunity to start addressing this complex problem. Slow progress in decentralization and low capacity in many rural road agencies. The ownership and classification of rural roads is poorly defined among key sector agencies. The responsibility for managing rural road networks typically overlap or is divided between several agencies - Public Works Departments, Rural Development Departments, Forest, Irrigation and various other Agriculture Departments as well as local bodies. This reality is not in tune with the decentralization policy of the country. Constitutionally, the management of rural roads was entrusted to PRIs or three tiers of local governing bodies after the passing of the 73rd Amendment to the Constitution in The 1 lth Schedule to this Amendment provides a list of public services that are supposed to be delegated to PRIs, including rural roads. State governments are supposed to enact state level legislation to ensure implementation of the decentralization policy. Yet, almost all state governments retain ownership of the majority or all of the low volume roads in their states, their field staff report only to officials in state capitals rather than to those locally appointed or elected and resource use remains at the state level only. Maharashtra and Karnataka are exceptions and have, on paper if not in practice, transferred rural roads to the PRIs. The views of district or other local government bodies are often not hlly considered in the planning process and they have a limited role in monitoring service delivery despite their being the most effected by poor service outcomes. The rural road sector also suffers from low levels of technical capacity in many areas due to poor human resource management and often weak career prospects as a result of overstaffing, frequent transfers and lack of specialization. As a result, many rural road agency field engineers need to upgrade their technical and contract management skills and more specialized skills such as for procurement, environment and social management need to be inducted into agencies. Low levels of technical capacity and a poor incentive structure hinder the ability of road agencies to absorb the PMGSY funds as well as prevent better maintenance. CENTRAL GOVERNMENT STRATEGY Project Approach. To address the poor rural accessibility in a more systematic way, the Prime Minister s Rural Road Program (Pradhan Mantri Gram Sadak Yojana, PMGSY) was announced in late 2. The PMGSY originally sought to achieve all weather access to every habitation with a population greater than 1 by 23, and all habitations of greater than 5 people by the end of the 1th Plan, 27. However, of the 64,791 unconnected habitation of The three tiers of local government are the district, sub-district (block) and village levels. 18

27 population 1 and above, works on only 22,116 are either completed or under completion under the program. The program has also funded the works for connecting another 24,339 habitation with population of less than 1,. Overall, the program has not been able to meet the target as defined in the policy statement mainly due to limited availability of funds as well as capacity constraints of road agencies and contractors. The MORD has been tasked with designing the program strategy and overseeing actual implementation by states and district bodies. The main elements of the GO1 strategy, as provided for by the published PMGSY guidelines available on the web at are: e e e e e e focus on new connectivity, although upgrading of existing roads is funded in certain circumstances ; broad prioritization of GO1 funds by preparation and use of core rural road networks and comprehensive new connectivity priority list, together designed to connect by a single link larger communities prior to smaller communities; raising of substantial new resources through the Central Road Fund which gathers revenue on a national fuel cess and redistributes the proceeds to undertake, inter alia, new constructiodupgrading of rural roads; rigorous and transparent monitoring of the proceeds of PMGSY funding; higher design standards and quality assurance procedures; and requirement for States to identify suitable PRIs (three tiers of local government) with funding responsibility for undertaking maintenance. Over the last three years the MORD and many states have had considerable success in implementing many parts of the PMGSY strategy. Indicators of PMGSY performance in four states is shown in Table 2. Nevertheless, there remains a challenge to develop an effective central government strategy in addressing the issue of inadequate maintenance on rural roads. Table 2: Indicators o f PMGSY Performance in Proiect States Indicator Himachal Pradesh Jharkhand Rajasthan Uttar Pradesh Share of works rated as good or better (median for all states is 82%) Roads constructed ,225 3,136 Km constructed ,347 5,214 % works started that are complete (median for all states is 36%) Habitations connected ,28 1 2,45 Gg. difference between estimated and -2.2% -8.26% -3.4% actual value of tenders I % of districts where internet connectivity is 83% I 1% I 1% I available 77% I % of districts where PMGSY data is entered 1% 1 1% 1 1% 1 online Source: as of July 24 and State implementing agencies. 19

28 Funding Gap. Current estimates suggest that the total investment required to meet these targets is of the order of Rs. 1,33 billion (US$28 billion). In 1999, a one rupee cess on every litre of diesel and petrol sold was imposed by GO1 and in 2, a Central Road Fund Act was promulgated to direct the resources obtained through this cess to the improvement of national and state highways as well as rural roads. By law, 5 percent of the diesel cess is directed towards rural road development, a sum amounting currently to about Rs. 3,15 Cr.(US$7 million) per year. The cess was raised by one half of a rupee in 23. To date, allocations for the PMGSY are being made to states on the basis of a formula as follows: 75% weighting for number of unconnected habitations in the state as a percentage of the country's total unconnected habitations (i.e. connectivity backlog) and 25% weighting for the number of connected habitations in the state as a percentage of the country's total connected habitation, with a caveat that all states are to receive at least Rs.2 Cr per year. Given current estimates, there is a large shortfall between the annual need to meet the PMGSY targets and available resources. The MORD is proposing to use domestic and external borrowing to deliver the program. Even assuming that the PMGSY meets its target, those living in approximately 17, smaller habitations, or about 5 million people, will remain unconnected. SECTOR ISSUES TO BE ADDRESSED UNDER THE PROJECT Improving Maintenance and Asset Management. The first sector issue to be addressed under the project is to seek satisfactory levels of rural road maintenance in the project areas as a minimum. Indeed, if the projects fails to make headway on this aspect, there is a risk that the Bank funding may compound the problem by adding to the stock of rural roads to be maintained. The improved maintenance practices being sought are: state and local resource mobilization for rural road maintenance; timely preparation, procurement and implementation of maintenance programs; implementation of plans to effectively address existing maintenance backlogs; the effective involvement of road users and local bodies in planning and monitoring rural road network performance; establishment and actual use of simple maintenance management systems for preparing and monitoring the implementation of annual maintenance plans at a local level; and use of the private sector and more modern techniques for delivery of maintenance works, The project seeks to provide motivation on state and local governments as well as road agencies participating in the project to plan, resource and efficiently implement adequate maintenance programs on their core rural road networks. The key element in this is the employment of a financial mechanism, supported by a suitable disbursement and legal framework for Bank funds, that rewards better maintenance (see Annex 4). Improving Rural AccessibiZity. The project will build on the GOI's strategy for addressing the current low levels of connectivity by bringing more resources to the most poorly connected states and districts. The project will work within the existing framework of the PMGSY as much as possible rather than establish any parallel structure so as to enhance efficiency in the delivery of the program. The ambitious target for connectivity that the GO1 has 2

29 set itself requires a longer term commitment from external agencies. The project will be the first in a series of Bank instruments to provide financial support over the medium term to the PMGSY. Support Decentralization. Insofar as greater decentralization can contribute to better rural road management by making the impact of costs and benefits of actions less remote from decision makers, the proposed project will seek to support capacity development at the local level of government wherever feasible, most particularly at a district level. The appropriate fields for capacity development will depend on the level of decentralization already attained in any particular state - from actual funding, planning and implementation of maintenance in those states that are already quite decentralized to more modest reforms such as greater oversight of state agency engineers, enhanced coordination between stakeholders and better published maintenance plans and results. Capacity Building of Existing Rural Road Agencies. The project will also assist the MORD to build capacity within the rural road sector, although the majority of PMGSY investment in this area will not fall under this project. The project will support, however, wherever necessary the training of staff, development of technical manuals and guidelines as well as greater use of IT in management decisions in four states. The most important areas for such support will be in the areas of maintenance planning and implementation, environmenthocial management and poverty impact assessment. Potential for Expansion of Bank Support to PMGSY Under this Project. The scope of the Project may be expanded to cover additional districts at the request of the Government of Lndia and in agreement with the Bank, subject to satisfactory performance in implementation of the Project. The scope of the project may also be expanded to cover additional poorly connected state (e.g. Bihar). Follow on Projects. Follow on projects can be made available to the PMGSY for use in any or all the core state^"^, including the four already covered, provided that: At national level e e Agreement on increased proportion of Bank funds to be allocated between states on the basis of performance in maintenance o f core rural road networks; and More cost effective design and specifications are applied in Participating States At state level e Endorsement of Project Preparation and Implementation Framework, if not already done; e Endorsement of state level maintenance action plan, preparation of district maintenance plans for whole state and adequate budgetary provision for their delivery if not already done; e Allocation of PMGSY funds between districts primarily on the basis of investment need as determined by the core networks and comprehensive district priority lists; The ten states that require the most expected investment under the program. 21

30 a a e a Further harmonization of procurement procedure and bidding document for all PMGSY works in the state; Satisfactory operation of the computerized on line Financial Management System as envisaged under the PMGSY guidelines, timely delivery of audit reports and response to deficiencies if identified, timely preparation of Financial Monitoring Reports; Endorsement of application of an agreed ESMF, as revised for all PMGSY works in the state; SRRDA functioning properly, enforcing proper application of relevant guidelines on field agencies and undertaking performance monitoring; and a Satisfactory implementation of all aspects (safeguards, fiduciary, technical and disbursements) of ongoing Bank funded project, if applicable. 22

31 Sector Issue Project Latest Supervision (PSR) Ratings Bank Financed - closed and ongoing Provide all weather roads in Rural Areas ~~ Provision of all-weather access to farms and villages; improvement of construction and maintenance procedures Improve the quality of like of the rural population through provision of basic allweather roads Project component to support rural in frastructure Upgrading farm to market roads Improve Rural Roads and Markets to increase income of small farmers. Project Component to support rural infrastructure I Gujarat Rural Roads Project (closed) Rural Roads Project, Bihar (closed) Andhra Pradesh Economic Restructuring Project Assam Rural & Agriculture Support Project UP Sodic Lands 11Project Diversified Agriculture Support Project Integrated Watershed Development Project I1 (Bank Financed Projects only) Implementation Progress (E') S U S S S S S Development Objective (DO) HS U S S S ADB - ongoing ADB - planned Rural Road Development Project (support to PMGSY in Madhya Pradesh and Chattisgarh) Rural Road Development Project (support to PMGSY in Assam, West Bengal, Orissa) 23

32 Annex 3: Results Framework and Monitoring INDIA: Rural Roads Project PDO Broader and more sustainable access to markets and services by rural population in participating districts Intermediate Res One per Component Component One: Provision of all weather access to all eligible habitations in participating districts me Indicator 1. % of habitations with all weather access to social services and markets 2. % of through routes in core rural road network in participating districts in fair or better condition (PCI52) 3. Level of road user satisfaction with rural road network Component One: 1.1 No of kilometers of roads upgraded 1.2 % of works out of compliance 1.3 1% delivery of eligible benefits to project affected persons Use of Outcome Information YR1-YR5: To determine if the project development objective is being satisfied YR2: Feed into strategy for adopting a Sector wide approach in the rural roads sector YR4-YR5: To determine if strategy needs to be modified for further support to program and replication in other states ing Component One: YR1-YR5: Low levels might flag either procurement problems, poor project management, inadequate rehabilitation to PAF s Component Two: Maintenance of core rural road networks in participating districts Component Three: Improved management and enhanced financing by state and local governments of rural road networks in participating districts Component Two : 2.1 No. of kilometers of rural roads subject to routine maintenance 2.2 No. of kilometers of rural roads subject to periodic renewals Component Three: 3.1 % of actual vs. reqd. maintenance funding for core rural road networks 3.2 % variance between budget and actual expenditure on maintenance of core rural road networks 3.3 % of periodic works on core rural road networks prioritized using maintenance management system 3.4 Publication of rural road performance and rural road expenditure information Component Two: YR1-YR5: To determine effective delivery of the component and identify inadequate attention by the states to asset preservation Component Three: YR1-YR5: To determine effectiveness of the program in establishmg institutional capacity to develop and implement further programs in the sector YR1-YR2: For comparison across the states and determining the allocation of the performance based component in phase-i1 * PCI is Pavement Condition Index. This is a five point scale established to categorize roads based on visual parameters, riding comfort or normal driving speed indicators. 5 is very good and 1 is very poor. The MORD issued in April 3, 24 a Circular to all States on the use of the PCI in managing maintenance. See website for more details (hth,:i!~ww-.ptn~s~.nic.in/circular.asp?cuirrentpa~e-2&crid=). 24

33 h 8 2 i? d 4 G e x 8 2 e 2: P 5 3 B E.e B.f E '5 4 f P.r S r Q b c a c a b e L c.- c 5 E 'c r c s b b 2 U c e a E 5 Q b L 4 I P P I + I- P j% I- IC, W + 3 \D IC, I- O IC, IC, IC, E: m D - W d - m m IC,.A N i- I 8 E -.- P w f! 3 N IC, V 8 2

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36 r ---I e ;a 2 - x 8 mm i e E 2 6 E 2 i e E d h 73 f? > N VI d 3 VI - N N d 3 m v1 w v, N m 3 2 I P v, 2 P.I - G + I 3 I r t-4

37 Annex 4: Detailed Project Description INDIA: Rural Roads Project 1. New Construction and Upgrading of Core Rural Road Networks (US$43.91 million) Civil Works (USs million). This includes new construction and upgrading of the core rural road network in four states to provide all-weather road access to habitations in identified project districts comprising up to 6% of all districts in the states, or 78 in all. The component is proposed to be implemented in four tranches over five years using NCB procedures generally in packages of Rs. 1-5 Cr. in line with existing PMGSY practice. Tranche I will commence from effectiveness and subsequent tranches annually thereafter in line with current PMGSY practice. However,,there may be some overlap in implementation of each tranche depending upon the capacity of the state agency and the local construction industry concemed. Details of works for which Detailed Project Reports (DPRs) have already been prepared as shown in Table 1 below. Table 1 : Works for which Detailed Project Reports are Substantially Ready in Four States The civil works are to be divided into two phases - a fixed allocation phase and a performance based phase as indicated in Figure 1 overleaf. Technical Examination Services (USS7.26 million). Consultants will be commissioned by each state to undertake independent technical examination of Bank fimded works. The specific objectives of the services are - for Bank funded rural road sub projects in the State - to verify: (i) proper application of environmental, social and techno-economic screening procedures for the selection of rural road sub-projects; (ii) detailed design is in compliance with agreed technical standards as well as stipulated environmental and social management measures; (iii) the quality of bidding documents is satisfactory and that procurement is undertaken in conformity with agreed procedures; (iv) compliance of actual works with contract conditions and quality assurance procedures as well as agreed environmental and social management measures; and (v) expenditures under the Credit/Loan have been made for the purpose intended (financial review). One firm will be hired to oversee the first two tranches of works in each state and then a separate firm for the remaining two tranches. 29

38 I Figure 1 : Proposed Funding Allocation System I I The total loan amount is approx 11% of PMGSY requirements in the 4 states. The total loan amount will be divided into two components: a fixed and a performance based component. The-fixed component shall be 7% of the total loan amount The fixed component will be allocated between the 4 states on the basis of the average of (GO1 allocation + value of projects cleared in the last year) in each state. For 24, this works out to the following: HP: 14%; JH: 11%; RA:32%; UP:43% A relative performance index (RPI) for Tranche-I is determined for each state based on the indicator and preset targets for each state. Actual maintenance expenditure as % of requirement of core rural road network in the state. The RPI can have three values (l=under par; 2=par; 3=above par) The RPI is weighted by the total investment requirement of the state to arrive at the percentages for allocating the perforrnance-based component... The fured component allocated to each state is divided into 2-3 tranches of procurement based on the level of preparation and the size of the fixed phase of the loan. The ceilings per state would be valid for three years after which if any state is unable to procure works to that value, it will be reallocated to other states capable of utilizing the funds effectively. The performance based component would remain as a single tranche States Tranche Tranche 11 Tranche Total fixed Tranche IV I I component (Performance based) min max HP JH RA UP Target Actual vs. required maintenance expenditure , , , ,42 Refer to item 3.1 in 1,345 1,345 1,346 4, ,182 Annex 3 for each 1,88 1,88 1,87 5,423 1,99 3,765 State 3

39 Implementation of Compensatory Forestry and Resettlement (US$l. million). Wherever roads require compensatory afforestation to meet the provisions of any Forest Department clearance, State governments will deposit finds to undertake this afforestation prior to the clearance becoming effective. Under current PMGSY policy and practice, the state implementing agency concerned is to deposit funds for afforestation with the local forest offices, Assistance to eligible project affected persons will be made through ongoing state public programs or through community mobilization. 2. Periodic and Routine Maintenance of Core Rural Road Network in Project Areas (US$235. million) This component is to be undertaken in every district where the Bank is providing additional investment concurrently with the four tranches of new construction works. The works (US$235. million, NBF) would be prepared and supervised by the same implementing agencies undertaking PMGSY works and will be implemented through a mixture of force account for routine works (in HP, Rajasthan and UP) and contract for periodic works. The size of the component was determined after discussion with Participating states and is roughly equivalent to a per km cost of Rs.2OY/year on average and works to be conducted on all the core rural road network of 1, km in all in these 78 districts. All districts that are seeking Bank funding in the first tranches have prepared and made public an annual maintenance plan. 3. Institutional Development (US$13.56 million) National Level (USSO. 96 million). There are two institutional development sub components at the national level. First, a poverty impact and rural road user satisfaction monitoring system is to be put in place. This is to be achieved through hiring a single technical support agency to prepare the methodology and manage the system on behalf of the MORD (US$.2 million). The actual data collection, to be undertaken three times during the project period, will be carried out by separate firms covering one or more states each (USS.56 million). Second, technical assistance and training is to be made available to the MORD and the National Quality Monitors to build capacity in various areas (US$.2 million) State Level (US$12.6 million). There are three sub-components to the state level institutional development inputs. First, techcal assistance consultants are to be commissioned by each state (US$4.24 million) with a view to: (i) develop and establish in use a simple Road Management System (RMS) in HQ and in district field offices; (ii) prepare annual maintenance programs and support the implementation by the road agency of these programs, including through the use of performance based contracting, on the core road network; (iii) recommend and help implement on a pilot basis a framework for transferring ownership of non core rural roads to PFUs; and (iv) transfer skills and procedures to an adequate number of staff in the road agency to sustain the use of the RMS and continuing implementation of maintenance. Second, various goods are to be procured by each State - material and quality control testing equipment, IT and associated office equipment - for use by the implementing agencies (US$4.72 million). Third, each state will undertake training needs analysis and implement training of their staff within the main rural road agency plus the local contracting industry (US$3.54 million). 4. Incremental Operating Costs (US$4.45 million) To be financed by the GO1 and States. 31

40 Project Cost By Component andor Activity Annex 5: Project Costs INDIA: Rural Roads Project Local Foreign Total us$ milion us$ milion us$ milion 1. New construction and upgrading of about 9, km of rural roads 2. Maintenance of about 1, km of rural roads Technical Assistance for institutional strengthening 4. Incremental operating costs Total Baseline Cost Physical Contingencies Price Contingencies Total Project Costs' Interest during construction Front-end Feeg 1.oo 1.oo Total Financing Required 'Identifiable taxes and duties are approximately US$7 million, and the total project cost, net of taxes, is US$ million. Therefore, the share of project cost net of taxes is 65%. On August 3, 24, the Bank Executive Directors, approved a 5 basis point waiver of the front-end fee for all IBRD loans (other than SSALs) to be presented to the Board in FY5. As ths project is scheduled to be presented to the Board on 23 September 24, and assuming that it is presented to the Board as planned or before July 1,25, the front-end fee payable for the Project will be an amount equal to ".5% of the loan." 32

41 Annex 6: Implementation Arrangements INDIA: Rural Roads Project National Rural Road Development Agency (NRRDA). The NRRDA provides technical and monitoring support to the MORD. The staffing of the NRRDA is being gradually increased, including through the use of short term singleton consultants. The NRRDA is working satisfactorily in its role. Himachal Pradesh. The GOHP has created the HP Gram Sadak Development Agency (HPGSDA) to receive and administer all PMGSY funds. The Public Works Department is the implementing agency for PMGSY and ths agency will also look after the maintenance component. The Executive Engineers of the PIUs have been designated as signing authorities for payments from the HPGSDA. The 34 existing field divisions in the six districts proposed for Bank funding should have the capacity to absorb an increased flow of PMGSY funds as well as implement the maintenance component. Jharkhand. The Jharkhand State Rural Road Development Agency (JSRRDA) has been created to receive and administer all PMGSY funds as well as oversee the implementation of the PMGSY. The regular field divisions of the Rural Engineering Organization (REO) of the Rural Development Department are actually implementing the PMGSY. The REO will be the implementing agency for the maintenance component also. The Government of Jharkhand is considering turning the JSRRDA into a fully fledged implementing agency, through hiring and deputation of about 15 officers, taken both from within the existing state road departments and from other public and private sector entities, and then outsourcing the design and supervision of works. This arrangement is unlikely to happen during the first year of the Bank supported program but may materialise thereafter. At present, the REO only outsources the geotechnical investigation and survey of PMGSY roads. Rajasthan. The GOR has established the Rajasthan Rural Road Development Agency (RRRDA) to receive and administer all PMGSY funds. It is not envisaged that this agency will have any technical capacity of its own but act purely as a shell organisation for accounting purposes. The PWD is the implementing agency for the PMGSY in Rajasthan. There are 8 divisions that are working part time to implement the PMGSY, under the control of 32 district PIUs headed by Superintending Engineers or Executive Engineers. For the maintenance component, the Agricultural Marketing Board, which also owns about 13, ktn of rural roads, as well as the PWD will be the implementing agencies. Adequate coordination mechanisms exists between these two entities to plan and implement a comprehensive approach to management of the core rural road networks. The implementation capacity in Rajasthan is adequate to implement both works components. Uttar Pradesh. The GOUP has created the UP Rural Road Development Agency (UPRDA) to oversee implementation of the PMGSY. In early 24, the GOUP announced its intention to implement an integrated approach to rural road management, for which the UPRRDA is expected to play an important role. The PWD and the Rural Engineering Service (RES) of the Rural Development Department are the implementing agencies for PMGSY in UP. Each has established dedicated division level PIUs in each district. For this project, works in 15 districts will be implemented by RES and 2 by the PWD. These agencies are generally outsourcing the geotechnical investigations and some of the survey work required during design. 33

42 There is a wide variation in the amount of funds going to each district (range from Rs.28 to Rs.6 Cr. per district in the coming phase of GO1 funded work) as allocations are now largely being made on the basis of investment need. Additional divisions are expected to be mobilized as necessary so that the GOUP s own norms on workload (max Rs.1 Cr. per division per year) are not violated. The maintenance component will largely be implemented by the PWD as the agency that owns the majority of the core rural road network. Other agencies that will implement part of the maintenance component are RES, local government and the Sugar Cane Board. The SRRDA will play an important role in helping to coordinate and monitor the maintenance component. Table 1 indicates the various agencies involved in implementing the PMGSY at the state level. Table 1 : Agencies State Nodal Department Implementing Agency Project Implementing Units State Technical Agency Himachal Pradesh I Agency 6 field divisions of PWD National Institute of Technology, Hamirpur Jharkhand Dept. 23 field divisions of Rural Engineering Organization Birla Institute of Technology, Ranchi Rai asthan 8 field divisions of PWD Malaviya Nat. Institute of Technology, Jaipur; MBM Engineering College, Jodhpur; BITS, Pilani; Kota Engineering College, Kota Uttar Pradesh Rural Development Dept. UP SRRDA 4 field divisions of PWD & 3 field divisions of Rural Engineering Services MNNIT Engineering College, Allahabad; KNIT, Sultanpur; Harcourt Butler Tech. Institute, Kanpur; IT-BHU, Varanasi; IIT Roorkee 34

43 Annex 7: Financial Management and Disbursement Arrangements INDIA: Rural Roads Project Summary Assessment The project is expected to have a financial management system which should be able to adequately account for project resources and expenditures. Strengths and Weaknesses Strengths. The project has the following strengths in the area of financial management: two out of the four participating States have participated in the State Infiastructure Technical Assistance (Ln IN) since April, 1999 and have some exposure to the Bank s disbursement procedures and financial reporting requirements; a budgeting and accounting system has been established on the basis of PWD s accounting rules and is operational for PMGSY as a whole with an on-line computerized system under implementation in phases (as a part of OMMS); staff are trained to carry out basic accounting functions at all levels including divisionspius under the PWD system; a system of periodic financial reporting from the divisions to the state is operational; and financial management arrangements are documented as part of the Program Operational Manual (OM) as well as a Supplemental Operations Manual (SOM) which lay down the accounting policies, procedures and processes, operation of the project financial management system and the reporting arrangements. Weaknesses Staffing: Staffing for finance function needs further strengthening, especially for newly created SRRDAs. An existing accounting system which primarily focuses on book keeping, and not particularly on financial management. I Mitigation Appointment and placement of Controller (finance) at the State level. A computerized and integrated FMS is being developed under the PMGSY project, in phases, as a part of the online management and monitoring system and undergoing compliance testing. FM arrangements set down in OM and SOM which focus on financial 1 reporting and monitoring. Implementing Entity. At the central level, technical inputs for the scheme are provided by the NRRDA and budgets and funds flow would be handled by MORD. FM arrangements under the Bank project are fully mainstreamed and centered around the PMGSY s existing arrangements wherein the newly created societies (SRRDAs) receive the project funds, incur project expenditures, account for them and provide financial reports to stakeholders. All states wishing to access funds fiom the PMGSY from April 1, 24 had to establish SRRDAs, bank accounts and payment and fimds flow procedures, as well as interim systems for accounting, reporting and auditing. The SRRDAs in the case of the Bank financed project, will be technically 35

44 supported by the PWD in Himachal Pradesh and Rajasthan, the Rural Engineering Organization in Jharkhand and the Rural Engineering Services Department and PWD in Uttar Pradesh to execute the work of preparing, procuring and supervising works contracts. The Bank project will finance 6% of the districts in each of the States, through program implementing units (PIUs) established under the PMGSY scheme. These PIUs, though housed in PWDKESREiO, would serve as an extension of SRRDAs in implementing the program. They are hlly accountable and responsible to SRRDAs for book-keeping. accounting and reporting purposes. These PIUs have been undertaking this function under the existing PMGSY scheme since Budget. The project will be budgeted on the expenditure side at the Union (center) level, as PMGSY works under an identifiable budget head item of the MORD. It will be sufficiently detailed to capture the various types of works proposed under the centrally sponsored scheme. A budget item will also be established on the receipts side at Union (center) for the World Bank Loadcredit under the project for the participating States. Suitable budget provisions have been made starting from FY24-5 on both sides. At the State level, adequate allocations will be provided for periodic and routine maintenance expenditure of the core rural roads (not Bank financed) under their regular budget heads (e.g. Major Head ). Progress against this component will be captured in the quarterly FMRs. The annual budget of PMGSY will be based on the annual work program of the participating states and will follow the usual budgetary preparation process for a centrally sponsored scheme. Funds Flow. The MORD, under guidelines for PMGSY issued in January 23, has set out the financial and funds flow arrangements for the overall scheme which will also be applicable to the Bank financed project. These stipulate that the funds from the Center (MORD) to States will flow through regular banking channels outside the treasury system of the concerned State Government. Funds will be released in two installments during a year in roughly equal tranches; after the first tranche, utilization certificates (along with a certificate from the Bank manager) will be submitted by the State for releasing the subsequent tranches. A State level autonomous agency (society) has been set up in each state that holds, accounts and reports for the funds released under the program. These agencies have established separate bank accounts for the PMGSY with a scheduled commercial bank at the State level which has intemet/other media connectivity and provide for cheque encashment facilities at all PIUs across the State. Two separate Bank accounts have been established at the State level - one for program works and the other for the administrative expenses (not Bank funded). Funds to PIUs will be transferred only in respect of the administrative expenses. In respect of program works, cheque books will be issued to PIUs and authorized persons allowed to issue cheques to contractors under pre funding limits and arrangements entered into with the selected Banks. For control purposes, the Bank is also infomed of the authorized persons for issuing cheques, details in respect of payees and the amounts of the contracts (contractors). To arrange for swift and timely payments, facilities like on-par facility, electronic clearing scheme, courier system and pre-funding limits are proposed to be provided by the banks. As a result of this unique feature, actual funds are not required to be transferred to PIU level. This will enhance intemal control over fund flows. Moreover, the preparation of accounts for the SRRDAs will be expedited as the monthly bank statement will facilitate preparation of books of accounts at the State level. Administrative hnds will be transferred to the PIUS bank accounts on the basis of criteria laid down in the guidelines. 36

45 Staffing. The MORD provides suitable staff to ensure the budgetary provisions and smooth and timely flow of funds. A qualified officer of NRRDA is responsible for over seeing day-to-day operation of the financial management system and for establishment of the agreed financial management arrangements, providing timely financial reports to stakeholders including the Bank, and providing overall guidance in respect of the financial management issues for the project. The finance team at the State level (SRRDA) is to be headed by a Financial Controller who shall preferably be a professional accountant or an officer fiom State accounts services of a minimum rank of a senior Accounts Officer supported by at-least 1 Accountant and 2 Accounts Clerks. At the PIU level (district), the accounts and finance team will comprise generally of one divisional accountant, and 1 clerk. They will be responsible for maintaining the cash book, other registers/documents, as required under the OM and SOM, and making the necessary data enties in the FM module of the OMMS. Training. This is being provided to project staff as per a training calendar developed by the MORD. The project will ensure that sufficient training is provided to finance staff at the State level and districts for maintaining books of accounts and discharging other FM functions as envisaged under the OM and SOM. Two rounds of training have been provided for the proposed FM module under OMMS. The training plan includes training on Bank disbursement procedures and financial reporting requirements. Accounting Policies and Procedures & Internal Control. As per PMGSY guidelines, books of accounts will be maintained using a cash based double entry system o f accounting for the entire scheme. At the PIU level, books of accounts are based on existing PWD requirements which have been revised to meet double entry requirements. At the State level (SRRDA) proper double entry books will be maintained which will account for all State level expenditures under the scheme. A Chart of Accounts based on existing PWD codes has been designed under the PMGSY Scheme and has been included in the OM and SOM. The accounting policies and practices and internal control procedures, also based on existing PWD requirements, for the scheme are captured in the OM, SOM and the PMGSY guidelines. These guidelines also lay down the formats of the books of accounts, financial reports and other MIS reports that will be required under the Scheme. As the books under the PWD system were not maintained under self-balancing (double entry) system, specific revisions to the books of accounts, chart of accounts and formsheports have been prescribed under PMGSY which is considered adequate to meet the requirements of the project. The information from the PIUs will flow to the State level agency on a monthly basis in pre-agreed formats for proper accounting and book keeping where a self balancing ledger and double entry based books of accounts are to be maintained initially manually, and thereafter on the computerized FM system as a part of OMMS. Regular bank reconciliation will be carried out at SRRDA and PIU as laid out in PMGSY guidelines. A subsidiary Chart of Accounts has been developed for the PMGSY to enable data to be captured and classified by expenditure center, budget heads, project components, activities and disbursement categories. Financial Management System. PMGSY guidelines envisage rollout of an on-line computerized financial management and accounting system as a part of the OMMS. A specialized external agency (C-DAC) has been employed to develop, implement and roll out the OMMS. The proposed system includes a Financial Management (Receipts & Payments) module. Although the OMMS started its roll out in December 22 all over India, implementation 37

46 progress has been slower than anticipated as problems were encountered by the districts/states and as a result, it is proposed that a gradual transition be now made. Implementation and roll out of the payment/financial management module for the PMGSY Scheme, under the OMMS, is being done in phases with the computerized Financial Management System being established at first at the SRRDA level. The books of accounts of the PIUs will be maintained on a manual basis initially, using prescribed formats. This is considered adequate to report on the usage of project resources at the start of the project. The monthly reports from the PIUs will be consolidated at an SRRDA level by feeding them into the FM system to generate the books of accounts and the required financial statements. This system will thereafter be upgraded by implementing the system at PIUs and integrating it with SRRDA by September 3, 25 (dated covenant). As reliable connectivity is still a problem for many remote regions, database transfers from PIUs to SRRDA will take place on a periodic basis through phone linehtemet rather than requiring dedicated connectivity. In the case of Bank financed states, it is expected that Rajasthan will be the first to move towards implementation of fully computerized system by September 3, 24, followed by HP, Jharkhand and UP. The Financial Management System (FMS) will help in accurately recording and timely reporting on the expenditures incurred under the project along with physical and procurement related progress. The software for the FM module (comprising of receipt and payment module) including the chart of accounts is undergoing compliance testing. Separate accounts for the administrative expenses will be maintained by the PIUs on an imprest basis and monthly reports (including cash flow and balance sheet in the prescribed format) will be provided to the SRRDA for consolidation. Maintenance Support: CDAC will be providing support and is planning to provide training in the module's use. Roll out and satisfactory functioning of the FM module is critical to funds flow, reporting and accounting and auditing under the project. EZigibZe Expenses for the Project. The GO1 currently provides funds in advance for PMGSY on a 1% grant basis. GO1 usually funds the costs of project survey/design, civil works, goods and limited incremental operating costs for new roads and upgradation of existing roads. It partially funds the costs of: (i) survey and design by providing Rs.1, per km to be reimbursed through the GO1 to State transfer for expenditure incurred on works contracts; and (ii) field supervision by providing about 1% of the works costs to pay for travel and other miscellaneous expenses incurred by executing agency staff during sub-proj ect planning, survey, design and supervision. The Bank project will fund the cost of the civil works, goods (essentially quality control equipment and computers) technical assistance and services. The actual expenses will be recorded and reported by the participating SRRDAs. In addition, the Bank would also fund limited technical assistance (poverty impact tracking studies) at the NRRDA level. Financial Reporting. Financial Monitoring Reports (FMR), designed in consonance with the proposed project components, to track financial and physical progress of the project have been agreed with MORD and the States. The format will meet the needs and requirements of: (i) MORD and NRRDA; (ii) State PWDs and the Project Management; and (iii) donors including the Bank. The FMRs also include reporting on the proposed maintenance component, funds for which flow usually through the State budget. Information in this respect will be collated in the agreed format by the concerned SRRDAs fiom various sources (PWD, RES, 38

47 Implementing Agency 4 participating States (SRRDA) and NRRDA 4 participating States DEN GO1 Audit Entity Project Audit State Annual Finance Accountsyy certified by CAG Special Account Auditors Private CA firm C. &A. G. C.&A.G. The audit covenants of loans which share the same implementing agencies as this project have been complied with till date. Under the Indian constitution, C&AG would also have a right to conduct performance audits of SRRDAs, if they receive more than Rs.2.5 million (US$55,) annually. These reports could be made available to the Bank on request. Incentive for financial accountability: Under the PMGSY, it is envisaged that funds for the October quarter would be transferred to the States only after receipt of a duly audited financial statements of the previous year ending March

48 The audits for the non-bank funded maintenance component of the project will be evidenced through mainstreamed accounts of the State government as a whole ("State Finance Accounts" & "Audit Report for the State issued by CAG"). This is usually conducted within a period of 12 months fiom the end of the fiscal year (as allowed under the applicable statute in this respect). Internal audit cum financial review. As a part of the internal control framework for the Bank financed works, a technical examiner team, to be employed to monitor all Bank funded works on the project includes a chartered accountant, under agreed terms of reference. This accountant will conduct periodic financial review of the project to assess the operation of the project financial management system, including review of internal control mechanisms, books of accounts, registers and other records and effectiveness of the procurement process. Disbursement Arrangements. Disbursements from the loadcredit would be made in the traditional system (replenishment and reimbursement with full documentation and against statement of expenditure). The claims/ SOEs will be prepared by the SRRDA for each of the State and forwarded to NRRDA for consolidation on a monthly basis. The consolidated claim would then be forwarded to the office of the Controller of Aid, Accounts & Audit (CAAA) in the Ministry of Finance. CAAA will validate the claims, draw down the special account if required and forward it to the Bank for further processing. Retroactivefinancing. A provision has been made for retroactive financing up to US$3 million. This covers eligible expenditures procured in accordance with Bank guidelines and implemented in accordance with other relevant operational policies. Retroactive financing will finance the relevant project expenditures incurred before the date of signing but after 1 April 24. Impact of Procurement Arrangements. As the bulk of the procurement for the project is expected to be handled by the PIUs, adequately trained finance staff at PIU are required to coordinate with the procurement staff to ensure smooth implementation and adequate financial accountability of the project. Superuision Plan. The project will require intensive supervision in the initial stages especially for ensuring successful implementation of the computerized Project Financial Management System in the project implementing entities. The other focus area during the supervision will be on meeting the training needs of the project finance personnel. FM supervision will be undertaken at the same time as the main supervision missions to the extent feasible. 4

49 Annex 8: Procurement INDIA: Rural Roads Project A. Institutional Capacity Institutional capacities vary somewhat across the proposed states. PMGSY executing agencies at the district level typically have adequate number of engineers with experience of procuring works through local competitive bidding procedures. All the implementing agencies - bar the Rural Engineering Services in Uttar Pradesh (up) and the MORD - have several staff who have experience with Bank procurement procedures from prior Bank funded projects. The state level implementing agencies included under this project have demonstrated adequate capacity to procure low value NCB works contracts. However, their staff, plus the staff at the MORD, are less familiar with the procurement of larger service contracts as envisaged under the project. Accordingly a number of staff from each of the implementing agencies have attended procurement training. Separate training on contract administration will be provided under the technical assistance and technical examiner consultancies. Country Procurement Assessment Review (CPAR) - This has been undertaken in Uttar Pradesh during 21 and the Bank is currently following up with the State how best to implement the recommendations. The proposed prior review thresholds indicated in this annex were derived after assessing the implementing agencies capacity to carry out project procurement as per World Bank Procurement Guidelines. B. Procurement Methods All Goods and Works financed under the Loadcredit will be procured in accordance with the World Bank s Guidelines for Procurement, January 1995, revised January and August 1996, September 1997, January 1999 and May 24. Consulting services to be funded through the Bank s Loadcredit shall be procured in accordance with the World Bank s Guidelines for the Selection and Employment of Consultants by the World Bank Borrowers, January 1997, revised September 1997, January 1999, May 22 and May 24. All goods and services will be procured using India-specific Model Standard Pre-qualification and Bidding Documents for Bank funded projects. The model NCB bidding document for works as agreed with the GO1 Task Force in 1997 has been modified to more closely match the requirements of the program but may be reviewed after the first round of tendering. Procurement arrangements are summarized in Tables A and Al, and are briefly described below. B1 Works [US$686 million] National Competitive Bidding CNCB): US$423 million equivalent including contingencies Works relating to rural road construction and upgrading will be procured under this category, Works will be tendered by executing officers of designated implementing agencies at the district level through competitive bidding in packages normally of Rs.1 to 5 million (US$22, to US$1.1 million). Packages typically will include several roads which may be geographically dispersed. The model standard bidding document has been modified, the more significant changes being as follows: (i) limit of subcontracting to 25%; (ii) inclusion of a five 41

50 year routine maintenance period to be paid for by the States; (iii) provision for an altemative authority to make payments; and (iv) restrictions on employment of retired Gazetted officers of the concemed state. Force Account and Local Competitive Bidding Procedures: US$263 million eauivalent For implementation of the annual routine and periodic maintenance programs (not Bank financed), State agencies will use force account and their own competitive bidding procedures. B2. Goods [US$4.72 million equivalent] Goods and equipment - including computer hardware and software, office and laboratory equipment will be procured following NCB procedures for packages below US$2, equivalent (total US$2.22 million). Small value off-the-shelf items individually costing US$3, equivalent per contract or less (total US$2.5 million) may be procured following Nationalhternational Shopping procedures in accordance with World Bank Procurement Guidelines. B4. Services [US$l6.1 million equivalent including contingencies] Consultancy services will be procured according to Table A1 below. B5. Other non-bankfinanced components [US$4.45 million equivalent including contingencies] These are incremental operating cost amounting to US$4.45 million (not Bank financed). C. Procurement Planning Procurement of all works packages will follow arrangements outlined in accordance with the Project's Procurement Plan agreed at Negotiations. D. Prior Review of Procurement Decisions by the Bank [Refer Table B] e e e All NCB civil works contracts valued at US$ 1.5 million equivalent and above; All NCB goods contracts valued at US$2, equivalent and above; 15% of all NCB civil works contracts in each tranche of works submitted to the Bank; and Consultant contracts with an estimated value of US$lOO,OOO equivalent and above for firms, and US$5, equivalent and above for individuals. E. NCB Provisions All NCB contracts shall be awarded in accordance with the provisions of Paragraphs 3.3 and 3.4 of the Guidelines for Procurement under IBRD Loans and IDA Credits published by the Bank as revised (the Guidelines). In this regard, all NCB contracts to be financed from the proceeds of the Loan shall follow the following procedures, or as otherwise revised from time to time after agreement between the Borrower and Bank: (i) Only the model bidding documents for NCB agreed with the GO1 Task Force, and as amended for this project only, shall be used for bidding; 42

51 (ii) (iii) (iv) (v) (vi) (vii) (viii) Invitations to bid shall be advertised in at least one widely circulated national daily newspaper, at least 3 days prior to the deadline for the submission of bids; No special preference will be accorded to any bidder either for price or for other terms and conditions when competing with foreign bidders, state-owned enterprises, smallscale enterprises or enterprises fkom any given State; Except with the prior concurrence of the Bank, there shall be no negotiation of price with the bidders, even with the lowest evaluated bidder; Extension of bid validity shall not be allowed without the prior concurrence of the Bank (i) for the first request for extension if it is longer than eight weeks; and (ii) for all subsequent requests for extension irrespective of the period (such concurrence will be considered by Bank only in cases of Force Majeure and circumstances beyond the control of the Purchaser/Employer); Re-bidding shall not be carried out without the prior concurrence of the Bank. The system o f rejecting bids outside a pre-determined margin or - bracket - of prices shall not be used in the project; Rate contracts entered into by Directorate General of Supplies & Disposals, will not be acceptable as a substitute for NCB procedures. Such contracts will be acceptable however for any procurement under National Shopping procedures; and Two or three envelop system will not be used. F. G. Procurement Information Procurement information will be collected and recorded as follows: prompt reporting of contract award information by the project management units for the respective components; and reporting of data as provided for in the On-line Monitoring and Management System. ( y.nic.in) Proposed Procurement Arrangements - Thresholds and Frequency of Supervision The project elements, their estimated costs, and proposed methods of procurement are summarized in Table A. Thresholds are given in Table B. Figures in parenthesis are the respective amounts to be financed by the Bank. 43

52 Table A: Project Costs by Procurement Arrangements (US$ million equivalent) Procurement Method' Expenditure Category ICB NCB OtheJ? N.B.F. Total Cost 1. Works () ( ) 1.oo () 236. () ( ) 2. Goods () () 4.72 (3.77) () 4.72 (3.77) 3. Services () () 16.8 (14.84) () 16.8 (14.84) 4. Operating costs () () () 4.45 () 4.45 () 5. Front End Fee () () (1.OO) () (1.OO) Total () (3 8.39) (19.6 1) () (4) 'Figures in parentheses are the amounts to be fmanced by the LodCredit. All costs include contingencies. 'Includes civil works and goods to be procured through national shopping, consulting services, services of contracted staff of the project management office, training, technical assistance services, and incremental operating costs related to managing the project. Table A1 : Consultant Selection Arrangements (US$ million equivalent) Selection Method Consultant Services Total QCBS QBS SFB LCS CQ Other N.B.F. Expenditure Category A. Firms () () (11.87) () () (2.97) () () B. Individuals () () () () () () () () Total () () (11.87) () () (2.97) () (14.84) 44

53 Table B: Thresholds for Procurement Methods and Prior Review Expenditure Contract Value Threshold Procurement Category (US$ thousands) Method 1. Works 2. Goods 3. Services Contracts Subject to Prior Review (US$ millions) 15% of all contracts NCB About 3 All >1.5 million (57.) >2, NCB None anticipated 1, firms FBS 12 5, individuals (9.3) Total value of contracts subiect to Drior review 66.3 Overall Procurement Risk Assessment: Average Frequency of procurement supervision missions proposed. One every 6 months (includes special procurement supervision for post-review/audits) to be conducted along with main supervision mission wherever feasible. Table C: Allocation of Loadcredit Proceeds Expenditure Category Amount in US$ million Financing Percentage Works % Goods Services % for all items procured locally at gross cost 9% of gross - expenditure Training and tax exempt services % Total Proiect Costs 399. Interest during construction Front-end Fee" 1.o 1% Use of statements of expenditures (SOEs). Disbursement will be made from the Loadcredit on the basis of statements of expenditure for (a) civil works for contracts not exceeding US$1,5,; (b) goods for contracts not exceeding US$2,; (c) consultants for contracts not exceeding US$lOO,OOO for firms and US$5, for individuals; and (d) training. Special Account. A Special Account will be maintained in the Reserve Bank of India and will be operated by the Department of Economic Affairs (DEA) of GO1 with an authorized allocation of US$3 million. This will be operated in accordance with the Bank's operational policies. lo On August 3,24, the Bank Executive Directors, approved a 5 basis point waiver of the front-end fee for all IBRD loans (other than SSALs) to be presented to the Board in FY5. As this project is scheduled to be presented to the Board on 23 September 24, and assuming that it is presented to the Board as planned or before July 1,25, the front-end fee payable for the Project will be an amount equal to ".5% of the loan." 45

54 Annex 9: Economic and Financial Analysis INDIA: Rural Roads Project Introduction There is a high incidence of poverty in the rural areas of India and about 7% of the Indian population live in villages. Consequently, to make substantial reductions in overall poverty levels, assistance has to focus primarily on rural areas. Major economic and social development of rural areas can only take place if the people in the villages have year round access to social and economic institutions and opportunities. In India, over 4 percent of villages are still not connected by all-weather roads. In view of the importance of village access to reduce poverty, extensive rural roads works are being undertaken under the PMGSY. The PMGSY program is not based on the prioritization of roads on economic criteria nor has it prescribed specific design standards based on estimated traffic levels. To indicate the potential economic and social benefits of the program, and thus to this CrediVLoan, the Bank undertook a study to estimate the likely impact of providing all weather access roads to different villages in the four selected States: Uttar Pradesh, Rajasthan, Himachal Pradesh, and Jharkhand. The study was also designed to determine the appropriate road design standards (investment) in relation to the potential traffic and acceptable economic returns. The Impact of All Weather Road Access The economic and social benefit analysis was based on cross-sectional comparison of connected and unconnected villages. The pairs of connected and unconnected village were selected to ensure that the paired villages had a similar resource endowment and were similar distances from the main road leading to a market. A total of 4 villages, five pairs of villages in each State, were selected. Detailed surveys were undertaken in each village to determine production, agricultural output and consumer commodity prices, social indicators and levels of traffic generated by the villages. Almost without exception, productiodcapita is higher in connected villages, a higher proportion of the crops is exported fkom the village and the prices received for the exported production are higher (the extent of the price differential is dependent on the State and the commodity). The data illustrate the very wide diversity of conditions in the rural areas of India, but, taking all the villages together, the average per capita production in the connected villages is about Rs.24 (US$53) higher than in the unconnected villages12. The more common term village is used in t hs Annex rather than the term habitation as defined under the PMGSY (see footnote on page 1) l2 The direction of causality may be rather ambiguous - villages with higher production and marketable surpluses might previously have had priority in road construction. 46

55 (a) Table 1 : Agricultural Prices and Production: Production Rs./capita Crop Exports Impact of Connection (% Production) on Crop Prices (Rs./ton) Prices Rs./unit Veg oil/lt Kerosenellt Sugarkg Saltikg D etergend.5 kg Brickdl Cementhag Uttar Pradesh Raj asthan Himachal Pradesh Road NoRoad Road NoRoad Road NoRoad o Just as the prices for tradable agricultural commodities are lower in unconnected villages, the prices of imported consumer goods are higher. For low valuehulk commodities like bricks and cement, prices are generally more than 1 percent higher in the unconnected villages. (c) Table 3: Socio-Economic Access: Uttar Pradesh Road NoRoad Raj asthan Jharkhand Himachal Pradesh Road NoRoad Road NoRoad Road NoRoad matriculate % health visit % mortality % electricity % n.a. n.a

56 Though there are exceptions (particularly in Raj asthan) villages with all-weather road access have populations with higher education and much higher access to health services (not always reflected in the mortality statistics). In general, the populations of connected villages also have rather greater access to electricity though rates in all very villages are low, with the partial exception of Himachal Pradesh. (d) Transport Mobility The transport surveys in the study were restricted to vehicles (including non-motorized) and did not count pedestrians or those riding animals; thus only a partial view of travel patterns was obtained. It might be logical to expect no motorized transport to villages without roads but, in reality, most of the villages in Uttar Pradesh, Rajasthan and Jharkhand have some measure of road access, through earth tracks, for some part of the year. In such unconnected villages, there may be relatively high generation of vehicle trips, but the trips are confined to tractors and light vehicles; buses and trucks operate only to villages connected by all-weather roads. The transport potential of buses and trucks are a multiple of the other vehicles recorded. Table 4: Vehicle Generation Rates: Rural Villages * Non motorized transport: bicycles in Jharkhand, carts in Rajasthan The very low vehicle generation rates for unconnected villages in Himachal Pradesh are more representative of villages with little effective motorized access. The high generation rates for connected villages is rather misleading as the roads normally connect several villages and thus the vehicle rates for connected villages reflect the cumulative generation of traffic from several villages. (e) Overall Impact of All-Weather Access The provision of all-weather access can have very substantial impacts on the social and economic development prospects of rural areas. Access to markets is improved, competition among traders often increases, the prices of agricultural inputs and consumer goods fall, access to outside employment improves, better access may facilitate the development of educational and medical services within the village and help to retain trained personnel, and access to social 48

57 facilities outside the village is improved. Roads, particularly paved roads, encourage the establishment of regular public transport services to villages. Whlle all-weather access is not the panacea for rural development, it is generally a necessary condition for sustained economic and social development. Economic Appraisal Methodology: Most of the candidate roads are designed to provide reliable all-weather motorized access to previously inaccessible (at least during part of the year) villages. Therefore, economic analysis based solely on measuring the reduction in Vehicle Operating Costs (VOC) of existing vehicles is unlikely to measure hlly the benefits of improving accessibility due to: There may be very little vehicular traffic - people have to walk and carry goods to the nearest road; a a a An all-weather road, with improved pavement conditions, often results in a substantial change in the composition of traffic - from tractors to buses and trucks; The intensity of agricultural production may increase in response to higher prices/lower input costs and a higher proportion of crops may be sold outside the village; The pattern of cropping may change to take advantage of cheaper and more reliable access to markets; and Substantial benefits may be generated by better access to social infrastructure and improved mobility through the establishment of regular public transport. The economic analysis of rural roads is much more complex than the analysis of upgrading existing all-weather roads, requiring a more multi-dimensional approach. However, the size of individual rural road projects is generally too small to justifjr the cost of detailed analysis and a more basic, generalized approach has normally to be undertaken. The appraisal methodology used for this project utilizes the parameters of difference between the connected and unconnected villages surveyed. The approach is broad and provides a generic analysis for roads of different length and standard, serving villages of different population size, with different levels of agricultural potential. Experience elsewhere suggests that some roads will generate much greater benefits than those estimated, while other roads may have very little impact. Development is dependent on many factors of which all-weather access is only one. In some villages other constraints, such as land tenure or water availability, may prove more significant than the lack of motorized access. Given that the higher and lower performing projects offset each other, it is not cost-effective to undertake detailed investigations for road improvements with individual costs of US$lOO,OOO or less. The economic analysis assumes a project life of 15 years with no residual value. The costs include the initial construction cost and subsequent maintenance costs, including the periodic resurfacing of the road. The benefits include the additional agricultural production expected, reduced VOCs and the travel time savings of vehicle passengers. Given the data available, assumptions had to be made for each of the main parameters in the analysis. 49

58 Main Assumptions (a) Benefits Agriculture produce surplus. After the provision of physical access, the rural community can more easily market the surplus produced within the village and get better prices for its products. Moreover, the improvement in road conditions results in direct access by trucks and reduced crop handling; this allows farmers to market more time and condition sensitive crops. The surveys demonstrate that connected villages have significantly higher agricultural production values than unconnected villages. Changes in production and cropping patterns take time to develop, and other constraints may allow only partial adjustment by farmers in previously unconnected villages. A conservative approach is adopted: with a road connection the valuekapita of agricultural production in the previously unconnected villages increases but only to 6 percent of the present production differential between connected and unconnected villages. The agricultural adjustment process is assumed to be equally spread over 5 years. Traffic and its growth. It is assumed that when villages are connected with an allweather road, their vehicle generation patterns will change to approximate those found in the presently connected villages. The average of the vehicle generatiodper capita patterns of connectedunconnected villages in Uttar Pradesh, Jharkhand and Rajasthan were applied to all roads. The vehicle generation patterns in Himachal Pradesh were excluded as the roads typically serve several villages. This method allows for changes in the number of vehicles, but more importantly for changes in the composition of vehicles. Traffic is assumed to grow at 5 percent annually, a low rate in comparison with recent traffic growth in India. No attempt is made to differentiate between normal and generated traffic and to apply different values to the flows. Much of the generated traffic may simply be people and cargo transferring from foot to vehicles and thus, while the vehicle tip may be generated, the travel is not. Vehicle operating costs. The savings in the vehicle operating costs (VOC) for each vehicle type were estimated using the SP: 3 of Indian Road Congress, Manual on Economic Analysis of Highway Projects for different type of roads. The model provides the VOC for both motorized and non-motorized vehicles. The unit savings for most vehicle types ranged from 3 percent to 5 percent of the VOC when compared with travel on an earthen road. Value oftime. There has been little research on the value of time for people traveling on minor rural roads. In order to estimate the benefits of savings in time for the user of village roads, the value of time for the passenger was assumed to be half of the unit value determined for the passengers using major roads. The average value used was Rs.6.7 per hour (US$.15). (b) Costs Construction costs. The costs of construction for black-top roads vary very considerably between the States, depending upon both the terrain and the haul distances for materials. Average construction costs in UP and Jharkhand are substantially higher than in either HP or Rajasthan: 5

59 Table 5: Financial Construction Costs Paved Roads Rs.h I No. of Roads Average Range 1 Uttar Pradesh 24 2,28, 1,389, - 3,486, Raj asthan Himachal Pradesh Jharkhand 582 1,488, 967, - 2,225, 93 1,35, 935, - 2,23, 35 2,283, 2,12, - 2,s 1,.9. The financial costs were converted into economic costs by using a conversion factor of Maintenance costs. The maintenance costs for the different surface varies with the cost of materials and the damage resulting from both weather and traffic. For black-top roads, it is assumed that the road would require resurfacing every eighth year, at a'cost of Rs.2,/km, and that annual maintenance during the intervening periods would average RsS,OOO/km. For gravel roads, re-gravelling is required every fifth year, at a cost of Rs.lOO,OOO/km. The maintenance costs in the in the intervening four years would average Rs.7,5/km. Again, the financial costs are converted into economic costs using the conversion factor of.9. Results of Economic Analysis The economic model was applied to district groups of roads in the four States, covering over 9 sub-projects representing a total of about 4% of the loadcredit value. Both the economic rates of return and modified economic rates of return (assumes that the returns fiom the investment only yield the opportunity cost of capital, both at 12%) were calculated. The analysis indicated a relatively wide spread in the economic results but the average rates of return are acceptable: Modified ERR Mean 32.9% 19.4% Median 28.5% 17.1% Over 7% of roads have rates of return in the range 15% - 2%. 51

60 ~ PMGSY: Modified Economic Rates of Return 6 I MERR (%) The results of the economic analysis for the individual states are shown in Table 6: Table 6: PMGSY: Economic Rates of Return No. of ERR Modified NPVK Roads ERR' Uttar Pradesh Raj asthan Himachal Pradesh Jharkhand Total 24 51% 25% % 17% % 21% % 18% % 19% 1.53 The likely economic returns from connecting villages with all-weather paved roads vary considerably, depending on construction costs, the distance from the existing all-weather road, the size of village and the production differential. Rates of return are high in Uttar Pradesh, despite the high construction costs, because of the large production differential, relatively short length of sample roads (2.5 km) and relatively high populations served. The economic rates of return for roads in Rajasthan may be somewhat underestimated as more than one village may be served by each road (these data were available for the other States). The returns on the roads in Himachal Pradesh are high, reflecting the relatively low construction costs and the large numbers of villages connected by each road (an average of three villageshoad); in reality, the impact may be even higher. Unlike in the other States, villages in Himachal Pradesh without roads are really without any motorized access. This is reflected in the very low vehicle trip generation rates detailed previously, Table 4. In Himachal Pradesh, no road l3 Assumes 12% cost of capital and reinvestment rate 52

61 really does mean no motorized access and the shift in travel patterns would not be from one type of vehicle to another, but from walking to motorized transport. The impact of shifting from foot to motorized transport is normally several times that from improving road conditions or changing the category of vehicle. The Choice of Road Standard The economic rates of return detailed in Table 6 are based on the construction of a blacktop road which has been adopted by GO1 as the de facto standard for PMGSY. The traffic flows on most of the rural roads in this program will be very low and it can certainly be argued that there are more cost-effective standards for low volume rural roads. Incremental economic analysis on the additional capital cost of paved rather than all-weather gravel roads indicates very low rates of return. Higher economic returns might conceptually be generated by downgrading the design standard, reducing the construction costsh and connecting more villages with the same total level of investment. The proposed paved rural roads, however, yield substantial economic returns which are sufficient to justify the investment, when compared with the do-nothing situation. The issue of appropriate standards for rural roads will form an important part of the dialogue between the Bank and GO1 during the implementation of the Project. At the outset, it has to be recognized that unpaved roads are not very popular in India. Most of the states do not have sufficient experience in design, construction, and maintenance of unpaved roads to the standards used in many other countries. Most of the unpaved roads in India are constructed under employment generation programs or under stage construction approach where sufficient funds for construction up to a sealed standard are not available. Adequate design, construction quality, and material specifications are often not enforced. The general lack of maintenance also results in the poor performance of gravel roads. Some states like Uttar Pradesh have no gravel in most parts. It is therefore understandable that rural communities often have a very high preference for paved rather than unpaved roads in India. Although the IRC SP2 does recommend the use of gravel roads for low traffic conditions most states usually ignore this option. Recently, some states have shown interest in construction of gravel roads under PMGSY. Some gravel roads have already been constructed under ongoing Bank funded projects and shown reasonable performance. There is increasing awareness amongst the states and the NRRDA that gravevunpaved roads could be a cost-effective solution especially for low-traffic conditions. IRC SP 2 is currently undergoing revision and the revised manual may put more emphasis on the use of gravel roads or other low-cost solutions especially for low traffic conditions. The current choice of paved roads can be attributed to the lack of sufficient experience with constructing and maintaining unpaved roads to an acceptable level of serviceability. However, the revised IRC manual as well as improvements in maintenance hding and planning as agreed under the project may allow less capital intensive road improvements and thus allow faster implementation of the PMGSY objective of 1% connectivity. In some States, this may mean gravel roads; in other States, without gravel resources, the use of brick surfaced pavements may be more appropriate at a lower cost alternative to paved roads. 53

62 Sensitivity Analysis Population served, production increases and construction costs are the key variables that can substantially affect the rates of return. The switching values, which reduce economic returns to 12%, for these key variables have been calculated for average projects in each of the States, Table 7. Table 7: PMGSY: Switching Values Individual +125% Joint( 1) +75% Joint(2) +5% -9% -55% -4% -2% -25% Taken individually, very substantial changes are required in the key variables to reduce the ERR to marginal levels. Taking all States together, the rates of return can be considered robust to plausible changes in the individual parameters. The large number of very small road projects within the Project adds to the robustness of the overall economic returns through diversifying sub-proj ect risks; increases in construction cost, or reduced production increases on some roads will be offset by reduced costs and increased production on others. Distribution of Benefits The provision of all-weather road access has a pervasive impact, affecting not only production and facilities within the village but also improved access to economic and social opportunities outside the village. All the village population should benefit fiom improved access to educational and health facilities and lower prices for basic consume goods. The expected increase in the value of agricultural production will benefit farmers and may increase the demand for labor, thus improving wage rates for landless laborers. Overall, the project should reduce the levels of poverty and social deprivation in the previously unconnected villages. The districts selected for implementing the Project are amongst the poorest districts in the States. 54

63 Financial Analysis The PMGSY program is a centrally sponsored scheme, fully funded by central government resources. Current estimates suggest that the total investment required to meet the 27 targets is about Rs. 1,33 billion (US$29 billion). This substantial resource requirement is expected to be funded partly through dedicated fuel levies and donor assistance, including this and subsequent Bank fbnded projects. In 1999, a one-rupee levy per liter of diesel and petrol sold was imposed by the GO1 and in 2, a Central Road Fund Act was promulgated to direct the resources obtained through this levy to the improvement of national and state highways as well as rural roads. This was raised to Rs.1.5 (US3.3 cents) per liter in 23. By law, 5 percent of the diesel levy is directed towards rural road development, a sum currently amounting to about US8 million per year, which is far short of the resource requirements to achieve the PMGSY targets. An analysis of unit costs for road construction from the PMGSY web site shows that the average unit costs for PMGSY roads to date in Jharkhand (US$41,/km) and Uttar Pradesh (US$43,/km) are high compared to Himachal Pradesh (US$29,/km), Raj asthan (US$25,/km), and Madhya Pradesh (US$29,/km). Most of the roads are designed with bitumen surface irrespective of the level of traffic. Greater focus on reducing unit costs will substantially reduce the overall funding requirements of PMGSY as a whole. The Indian Roads Congress and NRRDA are considering ways to reduce the unit costs and to adopt optimal design standards for rural roads. Currently, IRC is revising the IRC SP 2 to ensure, amongst other things, cost-effective road designs, rational criteria for selecting pavement surface type for different traffic and terrain conditions, use of alternative materials, and to include design of gravel roads. NRRDA is also preparing standard specifications for roads and bridge works for rural roads and a standard data book for cost-estimation to address the specific needs for rural roads, economize rural roads construction, and to introduce alternative material specifications. These specifications will be used for the construction of project rural road works when finalized. NRRDA is also in the process of preparing detailed guidelines for project preparations, a construction manual for performing various construction operations in the field. There is some evidence to suggest that some state governments are reducing their own outlay or borrowing for rural roads as a response to the substantial grant funds being provided by the centre. While this might be a concern if maintenance funds were being reduced (there is no evidence of this as yet), if new construction is being limited to PMGSY funded works this might be a positive outcome - given the substantially improved planning and execution procedures being employed on the program that imply an increase in the overall quality of public spending in the sector. Fiscal Impact While the investment burden on states and districts will be minimal, the project will create a maintenance obligation and added resource requirement to maintain the expanded rural road network. The rural roads constructed by this project will be maintained by state or local government rural road agencies. Typically, almost all road maintenance funding comes fiom state budgets and local government contributes little. Whatever local funding there is available for rural roads tends to be used for new construction and upgradation rather than maintenance. 55

64 The incremental fiscal impact on the State governments of the new roads financed under the project are modest in themselves (see Table 8 below). During a five year routine maintenance period following the constructioddefects liability period, State govemments are contractually committed to funding the maintenance of project roads. The costs of this commitment are shown below which assumes that each state receives an allocation fiom the loadcredit in the same proportion as GO1 guidelines. Depending on the final allocation and tendered rates, the actual commitment could be rather more or less than this in each State. Table 8: Estimated Financial Commitment from States for Routine Maintenance of Project Roads (23 The fiscal impact of the PMGSY program as a whole is more pronounced and, once complete, will be approximately ten times the commitment as shown in the table above. Independent reviews of the funding and management of maintenance of rural roads in all four states, has demonstrated, inter alia the limited funding that is being available by state governments for this activity. The actual and required allocations for rural road maintenance for the four states are shown in Table 9 below. Note that Rajasthan undertook a backlog reduction program in 22 and 23 through Plan funds and borrowing totaling Rs. 6 Cr (US$133 million) which perfonned renewals on about 2, km out of the 3, km of estimated backlog at the time. Required per state noms* Actual Actual as % of Required Estimated current backlog Himachal Jharkhand Raj asthan Uttar Pradesh Pradesh** % 5% 26% 21% 3 1, ,5 56

65 Annex 1: Safeguard Policy Issues INDIA: Rural Roads Project Social Policy Issues Land. The Environment and Social Management Framework (ESMF) - including Environment Codes of Practice and a R&PF - was prepared on the basis of an ESA carried out in a participatory manner involving all stakeholders including affected communities, staff of executing agencies and line departments. The findings of the ESA of the ongoing PMGSY program indicate that in all the four states, construction has been carried out along existing tracks that are marked in the Revenue records (revenue tracks). The land available along existing tracks varies from 4 to 6 meters. Additional strips of land of about 2-3 meters are often required, except inside settlement boundaries, for construction. Farmers have often encroached on existing revenue tracks. However, during construction people willingly surrender any encroached area. For any land required beyond the revenue track, land has been donated. By and large, people have been marginally affected due to improvement in the design. No one has been displaced as the upgradation has been restricted to the available width in settlements. The process of identifying and quantifylng the social impacts fiom the construction of roads funded under the project will be phased over the project period. A total of 836 roads have been identified in all the four states that will be upgraded during the first year to 18 months of the project. The impact assessments have been undertaken and necessary measures incorporated in detailed project reports (DPR) prior to finalization. The R&PF provides for a checklist to collect information on the socioeconomic condition of project affected people which will be completed and included in the DPR. Mitigation Plans. To understand and assess the issues relating to land requirement, displacement, resettlement, and environment implications, the MORD commissioned a study to assess existing social and environmental conditions in Project States and also to prepare an ESMF with associated safeguard instruments i.e. R&PF and ECOPs to mitigate adverse impacts if they occur. The purpose of this R&PF is to formalize the support that has until now been only informally provided - e.g. provision of alternate land in some cases. Options for support to vulnerable people include: (i) extension of ongoing government's specific program for rural poverty alleviation; (ii) alternate land, if available; (iii) cash assistance donated by all members of the beneficiaries/gram Sabha; and (iv) opportunities for employment during the construction period. Annual review of the functioning of the fiamework will be carried out and it will be modified, if necessary. Transfer of land to the respective department. The process of transfer of land required for the minor alignments varies fiom state to state: (i) in Himachal Pradesh, affidavits will be used for transfer of land from the land owner to the state government, and in addition gift deeds will be prepared by affected persons; (ii) in Jharkhand, affidavits will be provided; and (iii) in Uttar Pradesh and Rajasthan, Memorandum of Understanding will be signed between affected persons and concerned departments. The R&PF provides the formats which will be completed along with proof of land ownership and land will be made available before contractors are mobilized for smooth construction. 57